The ‘Non-Dom’ Tax Regime—and Its Future in the UK

If you were not previously familiar with the phrase “non-dom” in the UK, you may be now. The recent media coverage surrounding the UK Chancellor of the Exchequer’s non-dom wife, Akshata Murty, has certainly brought this 223-year-old legislation under scrutiny.

Very broadly, a non-UK domiciled individual (non-dom) is a term used for a UK resident whose permanent home is outside of the UK. Murty has been claiming the remittance basis of taxation, a favorable tax regime only available to non-doms. As a result, she has been able to shelter foreign income and capital gains—more specifically, significant foreign dividends—from UK tax to the extent that these have not been remitted to the UK.

It is not the first time that this colonial legislation has been criticized, but is the regime in jeopardy now more than ever?

The UK is Not Unique

One point often omitted from the debate is that the UK is not the only country that offers a preferential “expat” tax system. For example, Malta, Cyprus, and Ireland also recognize the non-dom concept and offer favorable tax treatment, partly thanks to the UK’s influence.

Some of these systems are in fact more generous than the UK’s. Malta also offers the remittance basis of taxation for non-doms. There is a flat rate tax at just 15% on income and capital gains derived from Malta and income remitted to Malta; remitted capital gains are, in some cases, tax free. Unlike the UK, there is no annual remittance basis charge; in the UK this starts at £30,000 ($37,500) per year once an individual has been UK tax resident for more than seven out of the previous nine tax years. There are also no deemed domiciled rules, which generally apply after 15 years of residence in the UK.

In Cyprus, along with other tax benefits, non-doms are exempt from taxation on interest and dividends for up to 17 years of residence. Unlike the UK’s remittance basis, this is the case even if the income has a Cyprus source or if it is remitted to Cyprus.

Some countries use residence-based, rather than domicile-based, tax systems to entice in foreigners. Portugal, for example, is attracting many high-net-worth individuals and entrepreneurs with its non-habitual resident (NHR) tax regime, which can be accessed for a 10-year period. With NHR status, individuals can enjoy Portuguese tax exemption on almost all foreign source income, 20% flat rate tax on certain Portuguese sources of income, and free remittance of funds to Portugal.

Even the famously adhesive worldwide taxing system of the US offers some short-term visas under which the individual is not regarded as US tax-resident.

Many of these tax systems are not dissimilar to the UK’s non-dom regime—other countries just use different names and timescales. The objective is the same: to make these countries a prime choice of destination for foreigners and thus attract inward investment. Why therefore should the UK not compete?

Looking at UK Reform

As a result of the recent media coverage, there is pressure on the government to make changes. Significant changes were introduced in 2008 and 2017, which made the UK’s non-dom regime less generous, but some believe these did not go far enough.

The Labour Party have vowed to abolish the non-dom system entirely and offer a shorter-term scheme. However, careful thought must be given to the impact this may have on the competitiveness and attractiveness of the UK, particularly coupled with Brexit. Arguably, there are other non-tax related incentives to living and investing in the UK. The US, which offers very limited tax breaks for foreigners, is still home to many of the world’s richest individuals.

A Middle Ground?

Perhaps a middle ground could be found whereby adjustments are made to the existing regime to make the system even less generous but still attractive. For example, the length of time a non-dom is able to access the remittance basis could be reduced to, say, 10 years from the current 15 years.

Rather than changing or abolishing the system, the criteria for being able to access the regime could be narrowed down. Domicile is currently a very gray area and HM Revenue & Customs (HMRC), advisers, and clients, spend inordinate amounts of time discussing the domicile status of individuals. A “statutory domicile test” could be introduced; perhaps a points system based on a wide range of factors that provides a yes/no answer as to whether the remittance basis can be used for any given tax year.

This could be linked to immigration law so that the remittance basis is only available to those who do not have indefinite leave to remain in the UK—a link which currently does not exist but could be perceived as fairer. As is the case with the statutory residence test (SRT) introduced in 2013, this could provide some welcome certainty for everyone, particularly when UK tax planning is dependent on a non-UK domicile status.

We could scrap our dual-concept tax system and, similar to Portugal, introduce a purely residency-based preferential tax system, available for a set number of years. In which case, rather than developing a domicile test, the SRT could be applied to provide certainty as to whether an individual can access the remittance basis. This is largely what the Labour party have alluded to but for only a very short period of five years—is this desirable?

Given the scale of Murty’s foreign dividends, the recent press coverage has focused on the remittance basis and the income and capital gains shelter this delivers. However, in many cases, the most valuable protection a non-dom status can provide is inheritance tax (IHT) shelter on non-UK situs assets. The main complaint with the present system is that the well advised can protect foreign situs assets from UK IHT for longer than 15 years where these are settled onto a trust created before the 15 years is up. However, where should the line be drawn—15 years? 10 years? Less? There is even scope to avoid UK IHT on many UK situs assets where these are held by trustees via an offshore company. The IHT rules were changed in 2017 so that UK residential property is subject to UK IHT regardless of the mechanics of ownership and perhaps these rules should go further.

There is a wide variety of figures and statistics flying around and it is hard to know which to believe. According to the latest figures from HMRC, 75,700 individuals claimed to be non-domiciled on their tax returns in the 2019–20 tax year, which puts the scale of the issue into perspective. The UK tax legislation applicable to non-doms is hugely complex and longstanding, and so the government would need to deploy a large amount of resource in order to abolish, change or reinvent the system. Is it right to spend a large amount of resource on a system used by so few people?

The non-dom debate is often embroiled in a class war and is perceived as a system used only by the super-rich—not helped by the recent focus on Murty. This, however, is not always the case. We often advise people with relatively modest means who are in the UK for a short period of time, with, say, some rental income in their home jurisdiction. In these scenarios, the remittance basis is often used not just to save tax but also to simplify reporting.

Given the bad press, there is certainly political pressure to make changes. This has not been helped by the media’s portrayal of the non-dom regime as a form of tax avoidance scheme, which is certainly not the case. There is, however, no simple quick fix, and so I am pleased I can write articles such as this one without having to make the decisions.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. 

Author Information

Alice Pearson is a Director in the Private Client and Tax team at accountants Mercer & Hole.

The author may be contacted at alice.pearson@mercerhole.co.uk.