Non-Dom Tax Gone?

There's been a lot of talk lately about the future of non-domiciled (non-dom) tax status in the UK.

Labour have previously pledged to abolish it* and now there are rumours that the government might scrap it entirely in this week’s Budget.

This wouldn't be a small change, as over 68,000 people currently benefit from non-dom status, one of those being Rishi Sunak’s wife.

*they've since back-tracked and promised only to change it 

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What is Non-Dom Status?

Non-dom status allows individuals who reside in the UK but have their permanent home ('domicile') abroad to enjoy tax benefits on foreign income.

To begin with, it's important to correct the press reports of the non-dom status loophole being closed. It’s not a loophole, it’s the law. And while it remains the law, hedge fund managers and Indian heiresses are entitled to take advantage of it.

It's firstly worth noting that those residing in the UK are obliged to pay taxes on any income earned within this country.

Furthermore, a significant number of non-doms elect to pay taxes on their global income voluntarily.

There are however a portion with substantial income abroad who can opt for the 'remittance basis' of taxation, paying UK tax only on UK income and foreign income brought into the country.

If you are non-domiciled and have been resident in the UK for at least seven out of the previous nine tax years you will have to pay a minimum £30,000 annual charge (the remittance basis charge) if you claim the remittance basis. This is equivalent to the tax on a UK income of around £105,000.

If you are non-domiciled and claiming the remittance basis and have been resident in the UK for at least twelve of the previous fourteen tax years, the remittance basis charge increases to £60,000. This is equivalent to the tax on an income of around £165,000.

Therefore the tax saving has to be at least that of the remittance basis to be worthwhile.

Case In Point: Akshata Murty

For some, the saving is more than substantial. Last year the Prime Minister’s wife, Akshata Murty received estimated dividends of £13.5m from her shares in her father’s company, Infosys.

That’s a tax bill in excess of £5.3m (using additional rate dividend tax of 39.35%).

Not a bad return on £30,000 remittance charge! [It is expected to double to the £60,000 soon as she’s been in the UK since around 2014. Tough times...]

Should It Be Abolished?

With many across the country struggling the answer shouted most loudly is yes. Why should some of the highest earners in the country pay a lower marginal rate of tax than some of the lowest earners in the country?

The rationale answer however is no.

There should be a sliding scale otherwise how would we encourage wealthy nationals to our country.

Once they are here, they pay tax on their UK income, they pay the remittance tax, they spend here and eventually, if they do choose to make the UK their permanent home, their worldwide income may eventually be taxed*.

The solution is therefore modification.

My suggestions for change would be:

• Reducing the period before they pay UK tax on foreign income from 7 years to 3 years.

• Introduce a graduated tax system on all foreign income for individuals residing in the UK for 3 to 10 years. This system would start with a 5% tax rate and incrementally rise each year, reaching the standard UK tax rate by the 10th year

Should the Conservatives however believe the forthcoming election is unwinnable, completely abolishing the non-dom status could be seen as a strategic ploy.

This would position Labour in a corner, potentially forcing them to reintroduce the policy in some form.

Such a manoeuvre could lead to headlines framing Labour as reinstating tax advantages for affluent non-doms, despite their current stance against it.

*OK, so they could use an Excluded Property Trust to avoid this, which is why I propose the sliding scale. Also, we can't assume this would be the case, just because they are wealthy doesn't mean they are well advised.