The row about Murty's tax status highlights how dangerous it is for tax policy to be decided in the heat of political combat rather than considering the longer-term reasons why specific tax reliefs were created in the first place. This article clarifies and puts in context the tax position of finance minister Rishi Sunak's Indian wife.

We continue to examine the controversy over the tax arrangements of the Indian wife of UK finance minister Rishi Sunak. While some of the political optics might appear poor, important principles about tax are being lost in all the noise. Akshata Murty, an Indian citizen, does not have to pay UK tax on income earned abroad. Murty earns money from shares in Infosys, the Indian software giant founded by her billionaire father. Her spokeswoman said she pays all tax due in the UK. The non-dom regime, which dates all the way back to the 1790s, is legal and has been reformed several times, with the rules for eligibility having been tightened. Further, a person using it and going through the process is doing what any person can do in using laws affecting what is taxed. In this sense, it is no different if a person gets tax reliefs for investing in a fund structure. 

The UK has a territorial tax code, as do most nations other than the US. Income and wealth sourced in the UK, for example, is taxed. Money that stays out of the UK, which is not remitted to the country is not (there are some caveats to this).

Even so, politicians from across the spectrum know that the general public is unlikely to be swayed by such details. What is undeniable is that it is not a “good look” for a Chancellor of the Exchequer to have financial arrangements (he owns US real estate) and for his wife to enjoy non-dom status when Sunak has pushed up taxes to the highest relative level since the early 1950s.

To cut through the political noise and explain why the non-dom regime is important and worth defending is Mark Davies, partner, Mark Davies & Associates. The editors are pleased to share these insights. The usual editorial disclaimers apply. Jump into the debate! Email tom.burroughes@wealthbriefing.com

The discussion around the tax status of Ms Murty, the Chancellor of the Exchequer’s wife, has been poorly handled by all concerned.  

Ms Murty’s initial statement, which suggested that her tax status was linked to her citizenship, was not correct in law and seemingly an attempt to misdirect. On the other side, opposition politicians consider themselves qualified to comment, even without an understanding of the rules relating to foreign domiciliaries. At the heart of this squabble is the fact that tax rules apply to everyone equally, and that even wealthy people, even the Chancellor’s wife, can claim a relief if they are entitled to it. Her detractors claim that for her to save tax because of her domicile isn’t fair, but tax rules are an arbitrary construct and examples of unfairness abound within the UK tax system. For example, two people earning similar amounts pay different amounts of income tax and National Insurance depending on whether they are employed or self-employed.  

The UK tax regime is antiquated and complicated. How much tax you pay depends on several factors, including the nature of the receipt, residency, and domicile. Where you are resident for tax purposes is not necessarily the same as the place where you are domiciled. Income tax was introduced by William Pitt the Younger in 1798 as a “temporary” measure to finance the wars with France. All UK residents were required to pay tax on UK sources of income, and on foreign sources, but only to the extent that they were remitted to the UK. This is commonly known as “the remittance basis.” I am sure that Pitt’s approach was practical as well as sensible because foreign sources are difficult to identify, even to this day. In addition, foreign income is often taxed at source and thus this taxation strategy avoided the same income being taxed twice in a time before double tax treaties.

However, over time the tax net has expanded to include capital gains and the remittance basis has been curtailed so that today the relief from taxation on foreign income and gains is only available to persons who are not domiciled in the UK. These people are commonly called “non doms,” but it is more accurate to call them “foreign domiciliaries” as they have a country of domicile outside the UK. 

Ms Murty was born and raised in India, of Indian parents, and therefore she has an Indian domicile of origin. This fact is indubitable. It is not a matter of choice, as your domicile at birth is granted to you by law. You take the domicile of your father if your parents are married, or that of your mother if they are not. Your domicile of origin has a particular adhesive quality which stays with you all your life unless you decide to abandon your roots and establish a domicile of choice elsewhere living in another country permanently or indefinitely.  

Prior to 2007, it was possible for a UK resident individual to claim a foreign domicile (for income tax and capital gains tax) for decades, almost indefinitely. However, most long-term UK resident foreign domiciliaries became “deemed domiciled” in the UK for inheritance tax, and not for other taxes, once they had been resident in 17 out of the last 20 tax years. However, there are some exceptions to the deemed domiciled rule for persons who can claim relief for inheritance tax due on death under certain old double tax treaties including India, Pakistan, Italy and France. 

After the Finance Act 2007 foreign domiciled UK residents must pay the “remittance basis charge” to claim the remittance basis after seven years' presence in the UK. Currently the remittance basis charge starts at £30,000 per annum, and it increases to £60,000 per annum for those who have been resident for more than 12 years. Further changes were implemented in 2017, when it was no longer possible to claim the remittance basis for income tax or capital gains tax, or for the purposes of inheritance tax, once the foreign domiciliary has been a tax resident in 15 out of the last 20 tax years. Therefore, there has been a trend under successive Conservative governments to limit the availability of the remittance basis for foreign domiciliaries gradually, while at the same time encouraging wealthy immigrants to move to the UK to pay taxes that would not have otherwise been received. 

It is completely proper for Ms Murty to claim foreign domicile status unless she intends to stay in the UK permanently or indefinitely. Of course, HM Revenue & Customs could challenge any individual’s claim for foreign domicile, but in Ms Murty’s case she clearly has not abandoned her connections to India. 

It has been reported that she has been a tax resident for more than seven tax years, but less than 12 tax years. Therefore, she can elect each year to either pay tax on her worldwide income and gains, or pay tax on her UK sources together with the remittance basis charge of £30,000. Her unremitted foreign sources would escape UK taxes. It has been reported that Ms Murty has a minority interest in Infosys and the dividend income could escape all taxes, but this is not the case, as India applies withholding taxes on dividends. 

It has also been reported that Ms Murty’s Indian estate could avoid UK inheritance tax on her death by claiming relief under the UK-India Double Tax Treaty, as mentioned above. However,  all foreign domiciled individuals can shelter their estate by establishing a “protected settlement” before they become deemed domiciled to hold foreign property. Nevertheless, journalists are keen to focus on Ms Murty’s domicile and Indian citizenship, and overlook the fact that Infosys probably qualifies for business property relief and is exempt from inheritance tax anyway, or that a transfer to a surviving spouse is also exempt from inheritance tax.  

In conclusion, it is to be expected that a politician’s family’s tax arrangements will be scrutinised, such as Ed and David Miliband’s family’s use of a deed of variation, or Margaret Hodge’s family’s use of the Liechtenstein Disclosure Facility. However, it is important that a sense of proportion is maintained. The taxation regime for foreign domiciliaries strikes a reasonable balance by attracting wealthy immigrants to pay tax which would not otherwise be collected. It is not perfect, as there are steps that could be taken to maximise inward investment, but the fact that the UK’s system has been copied by other jurisdictions should encourage us to enhance the regime, rather than abandon it.