Chartered Accountants and Professional Business Advisers

UK taxation on divorce by non-domiciliaries

More and more divorces now heard in the UK courts involve non-UK nationals where one or both of the parties are UK resident and may be non-UK domiciled.


For the purposes of UK taxation, domicile differs from residence. Where an individual is not a UK national, and has not formed an intention to remain in the UK permanently, it is likely that they will be treated as not domiciled in the UK for tax purposes. However, full details of the individual's background and future intentions will need to be obtained in order to determine their likely domicile status.

Tax advice should always be sought at the earliest opportunity by individuals who are divorcing to ensure that all relevant tax issues are taken into account in reaching a settlement. Where transfers are made under a divorce settlement between parties who are UK resident but non-UK domiciled, unexpected and expensive tax consequences can arise where overseas assets are involved.

It is vital that a detailed review of the source of funds held in overseas bank accounts, and of the nature of funds used to purchase overseas assets which are likely to form part of the divorce settlement, is carried out in order to establish the likely tax consequences of bringing the cash or other assets to the UK.

This note looks at the key tax issues to consider in divorce cases where either of the parties is resident but not domiciled in the UK.

The two possible ways in which resident but not domiciled individuals may be taxed in the UK:

UK taxation of UK resident and non-domiciled individuals (RNDs)

RNDs may choose to be taxed in the UK in one of two ways: the first is known as the 'arising' basis and the second is the 'remittance' basis, as explained below.

Arising basis - RNDs who choose the arising basis of taxation are subject to UK tax on their worldwide income and capital gains as they arise, and retain the benefit of their income tax and capital gains tax personal allowances for each year. This is the basis of taxation which automatically applies to UK resident and domiciled individuals.

Remittance basis - RNDs who opt for the remittance basis of taxation are subject to UK tax on their UK income and capital gains as they arise, but are only subject to UK tax on their overseas income and capital gains if these are remitted to the UK. A remittance is not confined to bringing cash or other assets to the UK, but can also extend to paying for UK services or settling debts linked to the UK using offshore income or capital gains, and buying UK assets with a loan secured on property representing unremitted offshore income or gains. Individuals taxed on the remittance basis of taxation lose their UK income tax and capital gains tax personal allowances except in very limited circumstances.

An RND aged over 18 who has been resident in the UK for more than 7 out of 9 preceding tax years has to pay a Remittance Basis Charge (RBC) of £30,000 for each tax year in order to access the remittance basis of taxation. The RBC rises to £60,000 once an RND has been resident in the UK for 12 out of 14 preceding tax years and to £90,000 once an RND has been resident for 17 out of the preceding 20 tax years. Many wealthy RNDs will choose to be taxed on the remittance basis, either to avoid having to pay tax on overseas wealth or in some cases to preserve privacy even where payment of the RBC is not justified financially.

Why does the basis of taxation matter for divorcing resident but not domiciled individuals?

There are complicated provisions which may apply to transfers between spouses where one or both parties to the divorce is an RND.

Where both parties have been taxed on the arising basis throughout their period of UK residence, there is neither an immediate income tax charge nor an immediate inheritance tax charge upon divorce (although both taxes need to be considered) but there may be immediate Capital Gains Tax (CGT) considerations on any transfers following permanent separation.

However, in cases where one of the divorcing spouses is an RND who has opted to be taxed on the remittance basis in any of the years in which they have been UK resident, complicated legislation needs to be considered if any overseas assets that form part of the family's wealth may be transferred between the spouses on divorce.

As explained above, RNDs who use the remittance basis are subject to UK taxation on income or capital gains that they remit to the UK. However, tax charges can also apply where RNDs give cash or other assets representing unremitted overseas income or gains to others who then bring the gifts to the UK. These tax charges apply where the donee is a 'relevant person' in relation to the RND donor. Where the donee who brings the gift to the UK is not a 'relevant person' in relation to the RND donor, they are known as a 'gift recipient' and there is no tax charge at the point when they bring the gift to the UK unless the RND donor can benefit from the gift.

Relevant persons

Where a 'relevant person' brings gifted property to the UK, this is taxed as a remittance by the RND donor. Spouses remain 'relevant persons' in relation to each other until the marriage is dissolved; under English law on the grant of the decree absolute. The following example illustrates the problems that could arise in poor planning of a divorce settlement in this situation.

Example A - A husband (H) and wife (W) are both UK resident and non-UK domiciled. H is an 'additional rate' taxpayer so that he pays income tax at 45% and capital gains tax at 28% on income or capital gains brought to the UK. H has substantial assets overseas including non-UK income which has arisen to him during the time when H was UK resident. Under the terms of their divorce settlement, H transfers £1 million cash from his overseas income account to W following decree nisi [an interim step in the divorce sequence] and she brings the money to the UK before decree absolute. As W is still a 'relevant person' in relation to H at that point, H will face a tax bill of £450,000 as a result of the transferred funds having been brought to the UK by W. This problem could have been avoided if W had simply waited until after the decree absolute to bring the funds to the UK.

This is a very simplified example and, in practice, very few individuals are likely to have overseas accounts containing purely income or purely proceeds from sales which gave rise to a capital gain. Careful analysis of the source of funds held by RNDs in overseas accounts should be carried out to determine the nature of funds held in each account and therefore determine the most suitable accounts from which transfers could be made. Such an analysis may not only minimise the tax payable on the transfers made under the divorce settlement itself, but also for the future.

Gift recipients

Even if W brings the £1 million cash to the UK following the decree absolute, H may still not be out of the woods. No longer a 'relevant person' in relation to H, W will be treated as a 'gift recipient'. So the provisions relating to gift recipients who bring overseas gifts from RNDs to the UK must be considered.

Where an RND makes a gift consisting of, or derived from, unremitted overseas income or gains, there will be a tax charge on the donor when the gift is brought to the UK if he benefits from the gift in some way.

Example B - H gives £1 million derived from overseas income or capital gains to his ex-wife. She then uses the cash to buy a holiday home in Cornwall, which both she and H use equally to spend holidays with their minor children in the interests of providing a stable environment for the children. In this situation, part of the gift may be assessable on H as he can be said to benefit from the gifted funds through his use of the holiday home.

It may be arguable that, if the £1million is paid under the terms of a court order, then W is not a gift recipient in relation to H. If so, there can be no tax charge on H even if he eventually does benefit from the amount that remitted to the UK.


Careful tax planning should enable the divorcing spouses to minimise the tax cost of any transfers under a settlement and thus maximise the assets available for distribution across the parties to the divorce.

Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.

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