Who qualifies for non-dom taxation, and what are their options?
The ‘non-dom ding dong’ between Labour leader Sir Keir Starmer, who is proposing to scrap non-dom status, and Prime Minister Rishi Sunak, whose wife is a non-dom, has kept the subject in the spotlight. Andrew Robinson from DSW Tax Advisory advises many high-net-worth clients in his role and, in this guide, explains which rules apply, who the non-doms are and what they should do now.
What is a non-dom?
Non-domiciled individuals live in the UK yet have their ‘domicile’ – the country they feel they belong – in another nation. They mainly were born abroad or have a parent from another country, while a tiny percentage are former UK nationals who have opted to make another country their permanent home.
Non-doms are only required to pay UK tax on money earned in the UK, not on income generated abroad unless it is transferred to the UK (known as remittances). However, this does not mean they are exempt from paying taxes on their overseas assets; they must generally pay taxes in the country where their assets are located. As a result, what they pay will be determined by the tax policy in that country.
Nonetheless, significant savings can be made if taxes are lower than in the UK, such as in the Channel Islands, which has a low-tax regime, or Dubai, which has no income tax.
Who qualifies for non-dom status?
Individuals must demonstrate to UK tax authorities that their domicile is outside the UK, which may include presenting proof of their family history if questioned by HMRC. Various restrictions have been introduced over the years, most recently in 2017 when the Conservative government ended ‘permanent non-dom status’.
Anyone who has lived in the UK for 15 of the previous 20 years and those who were born and originally domiciled in the UK and have lived here for at least a year since 2017 is no longer eligible for non-dom status.
Since 2008, when annual charges were introduced, non-doms also have to pay for the privilege. The current charges start at £30,000 for those who have lived in the UK for seven out of the last nine tax years, rising to £60,000 for those who have lived here for 12 out of the previous 14 tax years. Some non-doms, especially those with low income from overseas, choose to pay UK tax on all their earnings as the annual charge would outweigh any benefits.
Who are non-doms?
According to HMRC, there were 68,800 non-doms in the UK in the tax year ending in 2022, and between them, they contributed around £8.5bn in income tax, capital gains tax and National Insurance contributions to the Treasury. One of the most prominent non-doms is Prime Minister Rishi Sunak‘s wife, Akshata Murty, who agreed to pay UK taxes on her overseas earnings after her status was revealed.
Also, the University of Warwick and the London School of Economics (LSE) have stated that more than 93% of non-doms were born abroad, while 4% had lived abroad for a lengthy period. Most are from Western Europe (especially France), India and the US. Contrary to popular belief, the number from Russia and the Middle East remains relatively small.
The study also found that around 80% had income from some type of work rather than living off their investments. Most non-doms lived in or around London, with a lower concentration in Oxford and Cambridge. Over one in 10 adults in Kensington, the City of London, and Westminster were (or had been) non-dom, and one in five top-earning bankers was also a non-dom.
Do other countries allow non-dom status?
Many other countries give tax advantages to attract high-income earners. After David Beckham moved to Real Madrid in 2003, the Spanish government introduced the Beckham law, which enables ex-pats to avoid paying tax on foreign earnings for up to 15 years by paying a one-off sum of €100,000. Cyprus, Malta, Ireland and Portugal also offer similar arrangements.
What would be the impact of removing non-dom status?
Researchers at the University of Warwick and the London School of Economics estimated that removing non-dom status would raise more than £3.2 billion yearly – the figure quoted by Labour leader Sir Keir Starmer. They claim that, far from attracting money to the country, the current tax rules act as a disincentive for people to invest in the UK and that only 0.3% of those affected would leave the country if the rules were changed.
However, detractors contend that the data does not account for the whole value of non-doms to the UK economy, and many advisers believe it will result in an exodus and have a negative impact, with the loss of revenue from departures outweighing any new revenue received. Chancellor Jeremy Hunt has also expressed reservations about enacting any measures that could harm the UK’s appeal.
What should non-doms do now?
In practice, introducing new tax legislation will likely take some time. Even if there is an election in late 2024 and Labour gets into power, it is likely to be 2026 at the very earliest before any Bill would pass through Parliament, gain Royal Assent, and the changes could come into effect.
Non-doms, however, may want to assess their position and take professional advice to consider what impact the removal of non-dom status might have. Restructuring your portfolios, creating trusts and other entities, and gifting assets are a range of options for those who want to stay in the UK. Before deciding, anyone considering a move should thoroughly understand the tax regime in their new location.