The media storm surrounding the news that Akshata Murthy is treated as non-domiciled for UK tax purposes highlights the need to challenge common misconceptions and increase awareness of the beneficial impact that individuals with this status have on the UK economy.
What is a non-dom?
A non-dom, short for non-domiciliary, is someone who lives in the UK but is not legally domiciled here. Referred to as the remittance basis of taxation, they can elect to pay taxes only on their UK income and gains, but not any overseas income and gains (unless they bring them to the UK).
How it works
A non-dom resident can claim the remittance basis without a fee for the first seven years of their residency in the UK (albeit they lose their personal tax allowance of £12,570). However, once they’ve been a UK resident for at least seven of the previous nine tax years, they must pay a £30,000 annual charge. This increases to £60,000 once they have been a UK resident for a minimum of 12 of the previous 14 tax years. Non-doms are also not liable for UK inheritance tax (IHT) on their foreign assets acquired during their lifetime.
It’s important to emphasise that being a non-dom and claiming tax exemption in the UK on a remittance basis is completely legitimate and should not be viewed as tax avoidance or ‘doing something wrong’. The rules have been in place since income tax was first introduced in 1799, and are considered to help boost the economy by attracting wealth, businesses and jobs to the UK. Many other countries have similar tax rules in place to encourage inward migration, recognising the economic benefits of encouraging high-net-worth individuals to come and invest in their country.
The recent negative reporting around the fact that Akshata Murthy has been claiming the remittance basis emphasises the need to improve the public’s understanding about the difference between tax mitigation and tax evasion.
These commonly held misconceptions, combined with reporting which often seeks to sensationalise the topic of celebrity tax avoidance, have created a cloud of suspicion surrounding offshore tax matters and the tax affairs of non-doms. This is especially true following the publication of the Panama Papers.
Rules and Regulations
In reality, the offshore tax industry is strictly controlled. We live in an increasingly flexible and internationally mobile society and without the correct rules and regulations in place, there’s a risk that people may begin to arrange their UK day counts to remain non-UK resident. This would result in a drop in tax revenue and have a negative impact on the UK economy.
Currently, people are taxed on any post-arrival funds that they bring to the UK. However, the Government could consider taxing funds which are kept offshore and aren’t used or spent in the UK.
Changing the regulations in this way would keep the tax system beneficial for foreigners looking to move to the UK, while also protecting the interests of migrants who might be coming to the UK for sanctuary or just want to spend more time here.
Things to consider
Domicile of origin & domicile of choice
It is not just about physical presence in a country when determining whether or not an individual has non-dom status – it’s also a question of where their heart lies. Provided a person is born in wedlock, their ‘domicile of origin’ is determined by their father’s domicile at birth. Otherwise, the mother’s domicile comes into consideration.
Those exploring whether they might qualify as a non-dom should consider their father’s domicile position at the date of their own birth and whether they kept that position afterwards. A domicile of choice can in some circumstances take the place of a domicile of origin.
Non-doms often get bad press unfairly and the overall contribution they make to the UK economy could be said to be undervalued, but it is important to keep in mind that the rules are far from straightforward and usually require support from a non-dom specialist advisor. It’s also worth noting that non-doms will usually be required to complete tax returns in their home country too, which can add additional complexity and costs. Through our membership of HLB international we are able to support non-doms here in the UK and also with their overseas matters by drawing on the support and experience of our network members.