UK Domicile and Non-Doms – an explainer

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. We understand that Ms Murty is domiciled in India by origin, i.e. by virtue of her father’s own domicile when she was born, and she has not acquired a domicile of choice here.

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. At most, the possession of a UK passport may be taken as one indication of someone’s intention to spend the rest of their life in the UK, but domicile is not the same as nationality.

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. Likewise, someone can easily be UK domiciled and still possess another country’s passport. Many people have more than one nationality and passport, whereas one will always be regarded as domiciled in only one country at a time.

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.

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 (such as Akshata Murty) 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 of any foreign income or gains.

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

In the year to 5 April 2020, according to HMRC (see Statistical commentary on non-domiciled taxpayers in the UK - GOV.UK), there were 75,700 individuals filing tax returns in the UK who claimed non-domicile status (down from 78,600 the previous year), 64,700 of whom were UK residents.  Of the UK residents, probably about two thirds were taxed on the remittance basis.

The total income tax, capital gains tax and national insurance paid by all non-doms was £7.853 billion in the year to 5 April 2020, an average of just over £100,000 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. There may be many non-doms with such small amounts of offshore income/gains that electing for the remittance basis isn’t worth the candle, and many non-doms may not even know they are non-doms! There are also non-doms who do not claim the remittance basis of taxation because they are taxed overseas and get credit for overseas taxes against their UK tax bill, making it not worthwhile to claim the remittance basis.

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 rules of the tax system 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. The number of cases of this kind coming before the tribunals continues to grow.

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, such as those raised by the controversy over Ms Murty. 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 a flat-rate of EUR100,000 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?

Usually not, no. 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. (According to the BBC, Ms Murty receives substantial dividends arising from £700 million of shares in her father’s Indian IT company. That would be taxable in India, not because of her Indian citizenship, but because it is income with an Indian source. But 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. For example dividends paid from India to a UK resident would typically suffer only 10% taxation.

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.

In a working paper published in April 2022, looking into the trends and behaviours of UK non-doms, the CAGE Research Centre at the University of Warwick pointed out that:

“in total 97% of those who we classify as non-doms in 2018 were either born abroad (typically to a foreign domiciled parent) or have lived abroad for a substantial period… It is clear, then, that non-doms are globally connected individuals”

The HMRC paper quoted earlier (Statistical commentary on non-domiciled taxpayers in the UK - GOV.UK), suggested that there had been a modest fall in the number of non doms, which was now stabilising, partly through their becoming domiciled, partly from their leaving the UK, following the reforms made after the 2015 election, but that leaves scope for much argument over whether further curtailments, or abolition, of the status would have similarly modest effects.

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 recently announced that they will abolish non-dom status for tax if elected. Shadow Chancellor Rachel Reeves 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”.

More narrowly the Liberal Democrats have said that government ministers’ partners should not be allowed to hold non-domicile status. Currently ministers are not allowed to be non-doms, but this rule does not apply to their immediate family.

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.

The current government have not indicated any intention to change the domicile (or remittance basis) rules.

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
John Stockdale, Technical Officer, Chartered Institute of Taxation
Richard Wild, Head of Technical Team, Chartered Institute of Taxation