Non-doms, what's in a name?

Non-domiciled tax status is a relic of the British colonial era. Income tax was introduced in 1799 by William Pitt the Younger under George III, as a temporary measure to finance the cost of the Napoleonic Wars. However, he could not afford to antagonise the new class of colonial rich who had acquired their wealth by farming sugar cane in Jamaica or tobacco plantations in Virginia. To keep them happy and to encourage outward investment, he exempted all their foreign earnings from British tax.

What is a non-dom?

The non-domicile status allows people who live in Britain to declare another country as their real domicile or jurisdiction of origin, so that they do not pay tax in the UK on overseas earnings, such as rental payments on overseas property, dividends from foreign investments, or interest on overseas bank accounts, if they do not bring the money into the UK.

Domicile?

Domicile is wholly distinct from nationality/citizenship and residence. And while it is possible to be resident in more than one jurisdiction simultaneously, one can never have more than one domicile at a time.

There is no statutory definition of domicile. The criteria for determining where a person is domiciled have been built up over centuries of judicial decisions.

Broadly, a person’s domicile is the place that they consider as their permanent home and it is often the country with which they have the closest ties. It is common to refer to someone being domiciled in the UK but strictly speaking this means being domiciled in England & Wales, Scotland or Northern Ireland. In the US, each state is a separate country for domicile purposes.

An individual takes their father’s domicile when they are born as their common law “domicile of origin”. If they are born to unmarried parents, they take their mother’s domicile. In broad terms this domicile of origin will remain with an individual unless:

• their father or mother’s domicile changes, individuals under 16 then acquire that domicile as a “domicile of dependency”;
• an individual who is 16 or more takes up residence in a new country with the intention to remain there permanently or indefinitely; they acquire a “domicile of choice” in that country.

A domicile of origin can never be permanently lost; if the individual leaves the country that is their domicile of choice and does not intend to return there, the domicile of origin automatically ‘revives’.

Domicile and tax

Domicile can have implications for the succession of assets on death and the proper forum for matrimonial disputes, but it is also relevant to an individual’s tax status.

If an individual is domiciled in the UK, their worldwide estate is subject to inheritance tax (regardless of where they are resident). If they are non-UK domiciled (“non-dom”), the default position is that only their UK situated assets are liable to inheritance tax.

As for income and capital gains tax, the general rule is that individuals who are resident in the UK are taxed on their worldwide income and gains (‘arising basis of taxation’). However, UK resident non-doms can elect to take advantage of the UK’s ‘remittance basis of taxation’ for income and capital gains tax so that they only have to pay UK tax on offshore income and gains if they bring (remit) the income or gains to the UK.

Opting for non-dom status

Someone who is resident in the UK can declare on their tax return that their domicile for tax purposes is overseas. Being domiciled overseas can be hugely beneficial for people with significant global wealth as it means they don’t have to pay tax in the UK on overseas earnings — such as foreign investments, rental payments, or bank interest — as long as they don’t bring the money into the UK. They still pay tax on money they earn in Britain.

A recent study of the London School of Economics show that there are some 75,000 non-doms living in the UK, According to the research by the London School of Economics and University of Warwick, a fifth of top-earning bankers, a sixth of top-earning sports and film stars and two-fifths of all those earning more than £5 million a year have claimed non-dom status. In bits of South Kensington and Notting Hill, non-doms make up more than a fifth of households.

Under pressure from tax campaigners, successive governments — both Labour and Conservative — have repeatedly tightened the rules in recent years for people who live in the UK but declare themselves domiciled overseas.

A non-dom who has lived in the UK more than eight years has to pay a special non-dom charge of £30,000 per year. This charge doubles from the 13th year.

Deemed domicile

Non-dom status can be lost after 15 years.

Statutory deemed domicile rules treat non-doms who have been resident in the UK for at least 15 out of the past 20 UK tax years as though they were domiciled in the UK for UK tax purposes.

One can lose a deemed domiciled status by taking up residence outside the UK for four complete UK tax years. However, since 2017 individuals who were born in the UK and have a UK common law domicile of origin, but who subsequently leave the UK and acquire a domicile of choice abroad, are treated as deemed domiciled in the UK during any period when they are subsequently UK tax resident (subject to a one year grace period). These are ‘returning UK domiciliaries’.

Can HMRC challenge domicile?

It is unusual for HMRC to challenge domicile during one’s lifetime. This is more likely upon death, in particular if the executors are filing an inheritance tax return reporting that non-UK assets are outside the scope of inheritance tax. It is advisable to consider one’s domicile beforehand and to write a detailed statement setting out the background to one’s circumstances that demonstrate one’s current domicile. The executors can then use that domicile statement to support their claim.