UK’s no-dom regime does not deserve attack

The UK’s non-dom regime is again in focus due to the tax treatment of the Indian wife of Chancellor of the Exchequer Rishi Sunak. While some policy optics may seem poor, important principles get lost in all the noise.

Last week, the media revealed that the wife of the British finance minister, Rishi Sunak, is an undomiciled resident. Akshata Murty, an Indian citizen, does not have to pay UK tax on income earned overseas. Murty makes money from the shares of an Indian software giant founded by his billionaire father. Her spokeswoman said she was paying all taxes due in the UK.

One might wonder why any of this matters, beyond attempts by the opposition Labor Party and others to embarrass Sunak and his Conservative Party colleagues. The political “optics” of this episode is, admittedly, mediocre. Sunak has raised taxes on the British public to, he says, fund care for the elderly – now a big expense item – the National Health Service, and to pay down pandemic-bloated debt. Taxes are at the highest level as a percentage of GDP since the early 1950s. This has hurt the Tories’ position in the polls, creating problems for Prime Minister Boris Johnson.

That said, the non-dom regime is legal and has been reformed several times, with eligibility rules tightened. Moreover, a person who uses it and follows the process does what anyone can do using the laws affecting what is taxed. In this sense, it is no different if a person receives tax breaks for investing in a fund structure.

The United Kingdom has a territorial tax code, like most countries other than the United States. Income and wealth from the UK, for example, is taxed. Money that stays outside the UK and is not returned to the country is not (there are some caveats to this).

It is important, as this news service knows, that tax policy is not shaped by outrage, real or not, at the specific actions of individuals. Hard cases make bad laws – those in the House of Commons sometimes seem to forget this – and it can damage the country’s long-term position as a financial centre, with all the jobs and economic growth involved. The UK has for many years been a largely foreign-born-friendly place to do business and live (again, there are caveats to this statement). After Brexit, the need to be open and friendly becomes even more important.

This nation has strong and enduring trade and diplomatic ties with India; those who have come from this country to make a living in the UK are some of the UK’s most enterprising and dynamic citizens (sorry if that sounds a little condescending, but it’s also true). Lawmakers concerned about so-called “fairness” in tax matters really need to see through the fog of headlines to understand the need for legal stability and clarity. Similar considerations apply to arguments about public records of the beneficial owners of corporations and trusts – in the fury of “rich people” putting money into offshore centres, significant limits to privacy and security are ransacked. This news service makes no apologies for toeing this line, although it acknowledges the political slant on how the families of cabinet ministers are taxed. (Whether the government should raise taxes is a separate question.)

Here are some comments on the subject:

Mark Davies, Partner, Mark Davies & Associates
A non-domiciled individual resident in the UK pays tax on UK sources of income and gains, but may choose overseas sources of income and gains to avoid tax, unless they are paid, used or enjoyed in the UK. This is called the “discount basis”. The rule was originally intended to encourage overseas investment 200 years ago, but now the rule remains in the statute books to encourage wealthy foreigners to become UK tax residents.

At birth, an individual takes up residence from his father, or from his mother if his parents are not married. This is called the “original domicile”, which remains with the taxpayer for life, unless and until it is replaced by another domicile: a “domicile of choice”. A domicile of choice can only be established if the individual decides to reside permanently elsewhere and becomes tax resident in that country. Domicile has nothing to do with citizenship. Acquiring a UK passport could prove an intention to reside permanently in the UK, and thus indicate a domicile of choice in the UK, or it could simply be convenient for travelling. Citizenship is only one facet and other factors could demonstrate ongoing ties to the country of home of origin.

A taxpayer can choose each year whether or not to claim a foreign domicile if it benefits them, and non-dom status is not indefinite. Although it is possible to live in the UK for many years without intending to live there permanently and thus establish a domicile of choice, rules were introduced in 2017 which consider that a foreign domicile is domiciled in the UK if it has been a UK tax resident in 15 of the last 20 tax years.

Lara Mardell, Legal Director, BDB Pitmans
Non-domiciled people (broadly meaning people from abroad) moving to the UK initially have the option of using the ‘remittance basis’ of taxation. This means that they will be subject to tax on income and gains generated in the UK, and on income and gains outside the UK which are ‘transferred’ to the UK, directly or indirectly. On top of that, only their UK assets fall within the scope of inheritance tax.

These benefits begin to erode after (roughly) seven years of residence in the UK, when an annual charge of £30,000 (rising to £60,000 after 12 years) must be paid to use the installment basis. After (again roughly) 15 years of UK residence, the non-dom becomes “deemed domiciled” for all tax purposes. They no longer have the option of the remittance basis and their worldwide estate is within the scope of inheritance tax. They are then taxed like any other British resident.

Similar rules apply to foreigners in many countries, including Italy and Portugal. The reason is that the UK and these other countries have to compete with the rest of the world to attract investment and talent. Successive governments have recognized that the UK tax system has the potential to deter this. The aim is to balance fairness in taxation with a business approach that will benefit the whole economy.

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