UK Domicile and Non-Doms – an explainer (updated March 2024)

Notes

This explainer is an updated version of one originally published by CIOT in May 2022.

The prompt for that explainer was media coverage around the non-dom status of the Prime Minister’s wife, Akshata Murty. Most references to Ms Murty have been removed from this updated version. In a statement in April 2022 Ms Murty said she would, from then on, “pay UK tax on an arising basis” on all her “worldwide income, including dividends and capital gains, wherever in the world that income arises”. That was widely reported as giving up her non-dom tax status, though the situation may be more complicated than that.

There is further information in ‘Domicile - a guide’, a short guide to the concept of 'domicile' and its tax implications produced by members of the CIOT's Private Client (International) Committee, published in December 2023.

Q. Briefly, what is domicile and why is it being debated?

For tax purposes, the question of domicile is a longstanding concept and primarily relates to whether individuals who reside in the UK for periods of time but do not see it as their permanent home should have favourable treatment for UK tax purposes.

More than 90 per cent of those claiming non-dom status were born overseas, and non-doms are disproportionately high earners. Tax policy debate has therefore had to consider the balance between the attractiveness of the UK to this wealthy group as a place for them to live and invest, with fairness and questions of tax burden falling on those who can afford it – something which has regularly brought the issue into the political spotlight.

As set out below, Labour propose to abolish non-dom tax status, and now it appears the Conservative government is also looking at this.

Q. What does it mean to be UK-domiciled or non-domiciled?

An individual is domiciled in the UK if they ‘belong’ in the UK and it is their home. This is usually established through their parents’ (usually father’s) domicile at the date of the individual’s birth, known as ‘domicile of origin’; or by making the UK their permanent home and renouncing their native land. This last possibility is generally referred to as a ‘domicile of choice’, but that term perhaps understates the difficulty of making such a change: it is not a matter just of deciding, but of carrying through that decision in one’s style of life.

Domicile is a general law concept, transcending nationality, residence and ethnicity. There is a further layer known as ‘deemed domicile’ which applies only to tax, not general law, and is based upon how many years you are resident in the UK.

Q. So domicile is not the same thing as residence for tax purposes or having a UK passport?

No. Residence is based on physical presence in the UK over the course of a tax year, whereas domicile is about someone’s long-term home. Likewise, possessing a UK passport does not automatically confer UK domicile and having a foreign passport does not preclude having UK domicile.

Many people have more than one nationality and passport, whereas one will always be regarded as domiciled in only one country at a time.

Most other countries, likewise, pay little heed to an individual’s passport when considering the tax status of their residents. The USA is the most obvious exception, whereby US passport and Green Card holders are subject to US taxes on their worldwide income, rather as tax residents are in most other countries.

Q. What difference does it make to one’s UK tax liability?

People who are both UK domiciled and UK resident are taxed in the UK on the ‘arising’ basis. This means they are taxed in the UK on their worldwide income and capital gains (subject to mitigations and reliefs designed to avoid double taxation).

If someone is UK resident, but ‘non-dom’, then they can choose to be taxed on the ‘remittance’ basis for a number of years, meaning they are only taxed on foreign income and gains insofar as they are ‘remitted’ (i.e. brought into) the UK. A non-dom resident in the UK is always subject to UK tax on an arising basis on any UK-based income and gains, but any non-UK income or gains are not liable to UK tax unless remitted to the UK. Although the rules around remittance are complicated, most wealthy non-doms subject to the remittance basis can live in the UK without remitting much, if any, of their foreign income or gains.

Q. How many non-doms are there in the UK?

According to HMRC there were 68,800 individuals claiming non-dom taxpayer status in the UK in the tax year 2021-22, up from 68,000 in the previous tax year. In the tax year 2019-20 (ie before the pandemic) there were 77,300 non-domiciled taxpayers. (Source: Statistical commentary on non-domiciled taxpayers in the UK, published July 2023).

The total UK income tax, capital gains tax and national insurance paid by all non-doms was £8,490 million in the year to 5 April 2022, an average of just over £120,000 each. Clearly this population in general enjoys a very high income.

However there will be many individuals with much lower income, who may not file tax returns at all – perhaps because all their income is dealt with through PAYE. Non-doms with such small amounts of offshore income/gains (£2,000 or less) automatically qualify for remittance basis anyway, so do not have to make a claim for it. For others, electing for the remittance basis isn’t financially worthwhile, especially as it includes the loss of your income tax personal allowance. For some, being taxed overseas and getting credit for overseas taxes against their UK tax bill, will contribute to making it not worthwhile to claim the remittance basis.

Finally, many non-doms may not even know they are non-doms!

Q. Who are the non-doms?

An analysis published in April 2022 by Arun Advani (University of Warwick) and others found that:

• More than 93% of those classified as non-doms in 2018 were born abroad.
• The share of people claiming non-dom status rises rapidly with income, with three in ten individuals who earned £5 million or more claiming non-dom status in 2018.
• Non-doms make up a large proportion of finance and ‘city’ jobs. More than one in five top earning bankers is a non-dom.
• Most non-doms come from Western Europe, India, and the US.
• Most non-doms reside in and around London, especially central London.
• 80% of non-doms have earnings from some kind of work (or pension income) as their main source of income. Hence while the non-dom population are clearly an economic elite, for the most part they appear to be engaged in substantial paid work in the UK, rather than being passive rentiers.

Q. How do the domicile rules affect inheritance tax?

It is important to remember that it is not just income tax and capital gains tax which are affected by the domicile rules.

The estates of UK domiciled (including ‘deemed-domiciled’ – see below) individuals are charged to UK inheritance tax on the worldwide assets held by that person just before they died. If an individual is non-UK domiciled, the estate is charged to UK inheritance tax only on UK assets. At least, that’s the basic rule.

Inheritance tax used to be unique, in that someone resident in the UK for 17 out of the last 20 years became ‘deemed domiciled’. The current rules are that, as well as for inheritance tax, non-doms become deemed-domiciled after 15 years’ residence, for capital gains and income tax. For inheritance tax purposes only, deemed-domicile ceases once an individual is outside the UK for four complete tax years.

The double tax treaties for estate taxes which the UK has with both India and Pakistan contain an unusual provision so that even though a deceased person who is domiciled in those countries may be deemed to be domiciled in England and Wales for the purposes of UK inheritance tax, their estate will not suffer UK inheritance tax on any property situated outside of the UK provided the property passes under a foreign will.

Q. How does someone become UK domiciled?

As explained above, under general law someone is usually either domiciled by origin or (so-called) ‘choice’. So, you can either be born into it, or you can take the decision to make the UK – and nowhere else – your permanent home.

For tax purposes, someone with a foreign domicile generally becomes UK deemed-domiciled after 15 years’ residence in the UK whether they like it or not, thus becoming subject to the arising basis. Within that 15 years, a non-dom is free to choose whether to be taxed on the remittance basis or not. To choose the remittance basis they simply tick a box on their UK tax return and exclude their foreign, unremitted income and capital gains from arising basis taxation. For the first 7 years’ residence that is the end of the matter, but after 7 years’ residence they can only elect for the remittance basis if they pay either £30,000 or £60,000 a year for the privilege depending on the number of years they have been UK resident: it is clearly only worthwhile for them to make such an election if they have very substantial amounts of income and gains which they are not planning to remit.

Someone who has a UK domicile of origin and who was born in the UK becomes UK deemed-domiciled for income tax and capital gains tax purposes after returning to the UK and becoming resident in the UK. For inheritance tax purposes, such a returning individual becomes deemed-domiciled after completing one year of tax residence.

Q. Does being non-dom constitute tax avoidance, or exploiting a loophole?

No. The government defines tax avoidance as “bending the tax rules to try to gain a tax advantage that Parliament never intended”. The non-dom rules are explicit and contained within statute so being non-dom and paying tax on the remittance basis is nothing illicit or accidental.

Non-dom status cannot be called a loophole either – loopholes are opportunities for taxpayers, based on close reading of the legislation, that Parliament did not intend: there is no question that the general thrust of the rules around non-dom status were fully intended to operate as they do.

The current domicile rules have been part of the UK tax system since 1914, so they are not new either. Prior to 1914, the remittance basis was available to everyone in relation to overseas income. From 1914, various restrictions were introduced, but non-doms remained fully entitled to the remittance basis.

Notwithstanding all that, individual taxpayers do sometimes ‘try it on’. The definition of what constitutes a permanent home is imprecise, and much revolves around the taxpayer’s intentions for the future, which are hard to determine objectively. There are differences of opinion between HMRC and taxpayers which often need to be adjudicated by tribunals and courts.

Q. What is the justification for having the non-dom rules these days?

Whilst the domicile and remittance rules are over a hundred years old, they have survived huge changes in tax law made over the decades and by various governments. In the government’s 2016 consultation document on non-dom tax reforms, the foreword stated the ‘official’ justification which is that:

“The government wants to attract talented individuals to live in the UK who will help to contribute to the success of this country by investing here and creating jobs. The long-standing tax rules for individuals who are not domiciled in the UK are an important feature of our internationally competitive tax system”

This objective needs to be weighed against other considerations. Clearly, different people will have different views on how much tax the UK should be prepared to forgo to achieve it.

It also isn’t easy to establish how much tax, if any, the UK actually is forgoing as a result of these rules. We’ll look at this later.

 Q. Are the non-dom rules unique to the UK?

The UK is unusual in having the domicile concept play such a role in the tax system. However, it is certainly not the only country with specific tax regimes in place to attract wealthy foreign individuals. Italy, the Netherlands, Sweden, Portugal, Malta and Cyprus are amongst those countries with similar rules.

Italy, for example, allows those who migrate their tax residency to Italy from abroad the option to be taxed at an annual flat-rate of EUR100,000 for their foreign income for up to 15 years.

Q. Do UK resident non-doms taxed on the remittance basis pay tax anywhere else on their non-UK source income?

Sometimes. Generally people pay tax in a country either because they are resident there or because they have income sourced in that country.

By definition, UK resident non-doms on the remittance basis are resident in the UK, not in the other country to which they ultimately belong. So they are not taxed as residents in that other country. The big exception to this is US citizens, who are liable to US tax on their worldwide income, even if they do not currently reside in the US. But this is not an issue for non-doms from any other country.

However non-doms may have income sourced in other countries and in many instances that income will be subject to those countries’ tax laws in the first instance, e.g. through a withholding tax.

As an example we can consider the case of the Prime Minister’s wife, Akshata Murty. According to media reports, Ms Murty receives substantial dividends arising from £700 million of shares in her father’s Indian IT company. These are taxable in India, not because of her Indian citizenship, but because it is income with an Indian source. Dividends paid from India to a UK resident would typically suffer only 10% (or potentially 15%) taxation. The UK, by contrast, taxes income from dividends at up to 39.35%. When Ms Murty was paying tax in the UK on the remittance basis we can assume she will have been paying tax to the Indian government at 10-15% on income from those dividends as well as paying the UK remittance charge. Now that she is paying tax in the UK on the arising basis she will be paying tax in both the UK and India on her income from these dividends but tax agreements between the UK and India will entitle her to deduct her Indian tax liability from her UK tax liability so she does not suffer double taxation.

In practice, many countries do not impose tax on all types of income and gains arising in their territories, so it is possible for many wealthy non-doms to structure their investments to take advantage of this. Even where such income is taxed in the country of source, the rates of tax are often very much lower than the rates that would apply to residents, in part because of the limits imposed by double tax treaties (see Murty example above).

Again the US provides something of an exception: it will not give the benefit of the UK-US double tax treaty to UK residents on the remittance basis, so they will suffer 30% tax on US source dividends (for example from shares listed on the New York Stock Exchange). But the capital gains from selling such investments will typically not be subject to US tax for UK non-doms, unless they are US citizens.

Q. Would abolition of the non-dom rules yield more tax?

If all, or even most, non-doms remained in the UK, the answer is ‘yes’. The UK would collect more tax on their worldwide income on an arising basis than it does on a remittance basis, even allowing for double tax relief.

Conversely, if they all left, then the UK would lose the tax they currently pay.

The ‘billion dollar question’ is: how many would stay? The concern of those who defend the regime is that the abolition of the domicile rules, and taxing all UK residents on their worldwide income, could drive many wealthy individuals from the UK altogether, generating a fall in UK tax receipts. After all, as analysis by Advani et al has shown (see above), non-doms are globally connected individuals and, by definition, maintain the UK is not their permanent home.

However the 2017 reforms, which significantly tightened the non-dom regime, do not appear to have led to a large exodus of non-doms from the UK. HMRC’s analysis (Statistical commentary on non-domiciled taxpayers in the UK, July 2022) was that:

“decreases in the number of non-domiciled taxpayers and tax liabilities in tax year ending 2018 can be substantially explained by taxpayers becoming deemed domiciled in the UK. This analysis suggests there may not have been a fall in revenue to the exchequer as a result of the reforms, with those becoming deemed domiciled continuing to pay tax in the UK, and the tax received may have offset any effects of some of that group leaving the UK and no longer paying UK tax.”

Similarly, analysis by Advani et al found that:

“non-doms who lost access to the tax break were no more likely to leave the UK than those still benefitting. In fact, both our research and HMRC analysis suggest that the 2017 reform has boosted revenue collected without triggering an exodus.”

Aside from how the tax take would be affected, there is also scope for debate about the wider economic effects of hosting this large wealthy population in the UK. They may for example assist in generating investment, enterprise and jobs; on the other hand they are perceived to put upward pressure on London house prices. In recent years a Business Investment Relief has been introduced to encourage them to invest more in the UK; on the other hand, the tax rules around ownership of UK properties have been strengthened, leading to a higher effective tax burden.

Q. Are the domicile rules likely to be changed or even abolished?

The Labour Party have announced that they will abolish non-dom status for tax if elected. Shadow Chancellor Rachel Reeves has said Labour would replace it with a modern scheme for people who are “genuinely living in the UK for short periods to allow us to continue to attract top international talent”.

Reports in the Financial Times and elsewhere on 29 February 2024 raised eyebrows with the suggestion that Chancellor Jeremy Hunt may beat Labour to it. ‘Treasury insiders’ have apparently told the FT that scrapping non-dom tax status is among options being looked at by the Chancellor to fund tax cuts in the upcoming Budget, due to lower-than-expected revenue.

For good measure the same FT article suggested Labour’s position on non-doms may have softened to a ‘compromise four-year exemption’, though it notes that this could still raise more than £2 billion.

Even if non-dom status were to be abolished, it is likely that any such change would only affect an individual’s tax status. As mentioned above, domicile is a much wider legal concept affecting more than just tax, (e.g. matrimonial law) so it would be very complicated to sweep it aside entirely.

What any government could do, which would have a huge impact on someone’s tax status, is to reform/abolish the remittance basis of taxation, rather than take aim at domicile. The ability to claim the remittance basis depends upon someone’s domicile and is the method by which non-doms are able to keep foreign income/gains out of HMRC’s remit. Remove the remittance basis, and for income and capital gains tax purposes, domicile has little further part to play.

This explainer was written by:

Christopher Thorpe, Technical Officer, Chartered Institute of Taxation
George Crozier, Head of External Relations, Chartered Institute of Taxation

With additional content from:

John Cullinane, CIOT Director of Public Policy (to April 2023)
Ellen Milner, CIOT Director of Public Policy (from April 2023)
John Stockdale, Technical Officer, Chartered Institute of Taxation
Richard Wild, Head of Technical Team, Chartered Institute of Taxation