The UK's non-dom regime is in focus again because of the tax treatment of the Indian wife of Rishi Sunak, Chancellor of the Exchequer. While some of the political optics might appear poor, important principles are being lost in all the noise.

Last week media reports revealed that the wife of UK finance minister, Rishi Sunak, is a non-domiciled resident. Akshata Murty, an Indian citizen, does not have to pay UK tax on income earned abroad. Murty earns money from shares in an Indian software giant founded by her billionaire father. Her spokeswoman said she pays all tax due in the UK. 

One might wonder why any of this matters, beyond attempts by the opposition Labour Party and others to embarrass Sunak and his Conservative Party colleagues. The political "optics" of this episode are, admittedly, poor. Sunak has raised taxes on the UK public to, he says, finance elderly care – which is now a big spending item – the National Health Service, and to pay down debt inflated by the pandemic. Taxes are at the highest level as a share of GDP since the early 1950s. This has damaged the Tories' standing 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 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 and is not remitted to the country is not (there are some caveats to this). 

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

This nation has strong and long-lasting commercial and diplomatic ties to India; those who have come from that country to make a living in the UK are among some of the most entrepreneurial and dynamic citizens in the UK (sorry if that sounds a bit patronising, but it is also true). There really is a need for legislators concerned about supposed “fairness” over tax to see through the fog of headlines to understand the need for legal stability and clarity. Similar considerations apply to arguments about public registers of beneficial ownership of companies and trusts – in the furore about “rich people” putting money in offshore centres, important boundaries for privacy and security get trashed. This news service makes no apology for taking this line, even though it recognises the political optics on how Cabinet ministers' families are taxed. (Whether the government should be raising taxes is a separate issue.)

Here are some commentaries on the matter:

Mark Davies, partner, Mark Davies & Associates
A UK resident non-domiciled individual pays tax on UK sources of income and gains, but can elect for foreign sources of income and gains to avoid tax, unless they are remitted, used or enjoyed in the UK. This is known as the “remittance basis.” Originally, the purpose of this rule was to encourage outward investment 200 years ago, but now the rule remains on the statute books to encourage wealthy foreigners to become tax resident in the UK.

At birth an individual takes the domicile of their father, or their mother if their parents are unmarried. This is known as “domicile of origin,” which stays with the taxpayer for life, unless and until it is replaced with another domicile: a “domicile of choice.” A domicile of choice can only be established if the individual decides to permanently reside somewhere else and becomes tax resident in that country. Domicile has nothing to do with citizenship. Acquiring a British passport could evidence the intention to permanently reside in the UK, and thus indicate a domicile of choice in the UK, or it could simply be convenient for travel. Citizenship is only one facet and other factors could demonstrate ongoing connections with the country of domicile of origin.

A taxpayer can elect each year whether to claim foreign domicile or not 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 here permanently and thereby establish a domicile of choice here, rules were introduced in 2017 which deem a foreign domiciliary to be UK domiciled if they have been a UK tax resident in 15 out of the last 20 tax years.

Lara Mardell, legal director, BDB Pitmans
Non-domiciled individuals (which broadly means people from overseas) who move 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 arising in the UK, and income and gains outside the UK which are ‘remitted’ to the UK, directly or indirectly. In addition to this, only their UK assets are within the scope of inheritance tax. 

These advantages start to be eroded after (broadly speaking) seven years of residence in the UK, when an annual charge of £30,000 (rising to £60,000 after 12 years) needs to be paid to use the remittance basis. After (again broadly speaking) 15 years’ residence in the UK, the non-dom becomes ‘deemed domiciled’ for all tax purposes. They no longer have the option of the remittance basis and their estate worldwide is within the scope of inheritance tax. They are then taxed like any other UK resident.

There are similar rules applying to foreigners in many countries, including Italy and Portugal. The reason for this is that the UK, and those other countries, have to compete with the rest of the world to attract investment and talent. Successive governments have recognised that the UK’s tax system has the potential to deter this. The aim is to balance fairness in taxation with a commercial approach which will benefit the economy as a whole.”