Non-dom tax: the facts
The Chancellor’s wife is ‘non-domiciled’ we have all learned, and has had tax benefits as a result. This has led to a flurry of controversy, and a great deal of commentary about the non-dom tax system. While some of this has been correct, there has also been a great deal of confusion about exactly what benefits non-doms get, and for how long.
One might be forgiven, for example, for thinking that the tax benefits of non-dom status were available indefinitely, and that the UK was the only country to have such a regime for foreigners. It was even suggested that there is a ‘loophole in the law’ or a ‘tax avoidance scheme’ that non-doms can use, or that foreigners may need to use their non-dom status in order to maintain their citizenship. All of this is misleading.
This post is not about Akshata Murthy specifically, but is rather intended to clarify the actual tax rules that apply in the UK today to non-domiciliaries in general. Without writing a book (or several) on the subject it is impossible to cover the non-dom tax regime comprehensively which could be why so many commentators and even some politicians have been confused on the issue. The intention is, therefore, to focus on the key principles, which would apply in most cases.
So what is a non-dom?
The question of what a non-dom is, is in fact not straightforward, but in most cases a non-dom is an individual from overseas who, if they have become resident in the UK, does not intend to remain in the UK.
However, an individual who is not actually UK domiciled can become ‘deemed domiciled’ in the UK for tax purposes. This happens when the individual has been UK tax resident for (broadly speaking) 15 tax years (and can happen in other ways too). In practice, due to the way the years are counted, deemed domicile can sometimes arise after not much more than 13 years’ residence. A non-UK domiciled individual has certain tax benefits prior to becoming deemed domiciled, but on becoming deemed domiciled they are taxed under the same rules as a UK domiciliary.
Why do non-doms have tax benefits at all?
The reason for offering a favourable tax regime to non-doms is that ‘UK PLC’ has to compete with the rest of the world to attract investment and talent, and successive governments have recognised that the UK’s tax system has the potential to deter this. Many other countries also offer alternative (usually temporary) tax systems to arriving foreigners including, within Europe, Italy and Portugal.
The aim, which has evolved over the years (gradually becoming much less generous to non-domiciliaries) is to balance fairness in taxation with a commercial approach which will benefit the economy as a whole.
The benefits non-doms actually have – the remittance basis
The standard system of taxation, applying to income and gains, is called the ‘arising basis’. Under the arising basis of taxation, an individual is liable to tax on their worldwide income and gains. This is the only system available to UK resident individuals who are UK domiciled, and also to non-doms who are deemed domiciled in the UK.
The alternative system of taxation, offered as an option to non-doms who are not yet deemed domiciled, is the ‘remittance basis’ of taxation. If the non-dom chooses this option, they will pay tax on UK source income and gains and on foreign income and gains which are ‘remitted’ to the UK, either by being brought in directly, or indirectly (for example by paying a mortgage secured on their UK home). Other foreign income and gains are not taxed in the UK.
The remittance basis comes at a cost, which rises over time. Non-doms who elect to use it lose their personal allowances for income tax and CGT. Then, when they have been resident in the UK for (broadly speaking ) 7 tax years there is a charge of £30,000 for every year the individual wishes to use the remittance basis. This rises to £60,000 a year after (broadly speaking) 12 tax years.
Finally, as noted above, when the individual has been resident for 15 tax years, they become deemed domiciled for all tax purposes and lose the right to the remittance basis altogether.
Inheritance tax (IHT)
There are also advantages given to non-doms – until they become deemed UK domiciled – with respect to IHT. The worldwide assets of UK domiciled individuals, wherever they are resident, are within the scope of IHT, as are the worldwide assets of the majority of deemed domiciled individuals (though a few tax treaties provide otherwise in certain limited cases).
For non-doms who are not deemed UK domiciled, only their assets in the UK are within the scope of IHT.
Unlike the remittance basis, these IHT benefits are automatic and do not require an election.
Non-UK domiciliaries have certain tax benefits available to them for a limited time. Broadly speaking these benefits start to be eroded after seven years, and after 15 years they disappear.
Even before the 15 tax years has elapsed, once a non-dom has settled in the question might arise as to whether they genuinely intend to leave the UK, or whether they in fact intend to remain in the UK and have become UK domiciled as a result. If so, all the tax benefits are lost at that point.
The non-dom tax rules in the UK are not unusual, and like the other countries which have similar regimes, they were introduced in order to benefit the economy as a whole. They have been retained for this reason, though they have been restricted a good deal over the years and made more expensive for those who benefit from them. If further review of the rules is considered, the views of the public are likely to be influential, and these opinions need to be based on accurate facts.