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It’s time to rethink our perception of non-doms

By Craig Hughes, a partner and private client adviser at accountancy firm, Menzies LLP

The media storm surrounding the news that Akshata Murthy is treated as non-domiciled for UK tax purposes highlights the need to challenge common misconceptions and improve understanding of the positive contribution that individuals with this status make to the UK economy.

Put simply, a non-dom is someone who lives in the UK but is not legally domiciled here. As such, they can elect to pay taxes only on their UK income and gains, but not any overseas income and gains (unless they bring them to the UK). This is referred to as the remittance basis of taxation.

For the first seven years that a non-dom is resident in the UK, they can claim the remittance basis   without a fee (albeit they lose their personal tax allowance of £12,570).  However, once they’ve been a UK resident for at least seven of the previous nine tax years, they must pay a £30,000 annual charge. Once they have been a UK resident for at least 12 of the previous 14 tax years, this figure rises to £60,000. Non-doms are also not liable for UK inheritance tax (IHT) on their lifetime foreign assets when they die.

It’s important to emphasise that being a non-dom and claiming tax exemption in the UK on a remittance basis is completely legitimate and shouldn’t be viewed as ‘doing something wrong’ or anything akin to tax evasion. The rules have been in place since as far back as 1799, when income tax was first introduced, and support the economy by helping to attract wealth, businesses and jobs to the UK. Many other countries have similar tax rules in place to encourage inward migration, recognising the economic benefits that can be derived by attracting high-net-worth individuals to come and invest in their country.

The recent negative reporting around the fact that Akshata Murthy has been claiming the remittance basis emphasises the need to improve the public’s understanding about the difference between tax mitigation, which is allowed, and tax evasion, which is illegal. Commonly held misconceptions, combined with reporting which often seeks to sensationalise the topic of celebrity tax avoidance, have led to an undercurrent of suspicion surrounding offshore tax matters. This is especially true following the publication of the Panama Papers.

In reality, the offshore tax industry is strictly controlled and it is wrong to assume that non-doms are guilty of any wrongdoing. We live in an increasingly flexible and internationally mobile world and without the appropriate rules and regulations in place, there’s a risk that people might start arranging their UK day counts to remain a non-UK resident. This would cause tax receipts to plummet and have a damaging effect on the UK economy.

The current remittance basis system means people are taxed on any post-arrival funds that they bring to the UK. However, the Government could consider taxing any funds which are kept offshore and aren’t used or spent in the UK. Changing the rules in this way would maintain an advantageous tax system for foreigners looking to move to the UK, while also protecting the interests of migrants who might be coming to the UK for sanctuary or just want to spend more time here.

Determining whether or not an individual has non-dom status is about more than just their physical presence in the country – it’s also a question of where their heart lies. The country that is considered to be a person’s ‘domicile of origin’ is determined by their father’s domicile at birth, provided they were born in wedlock. Otherwise, the mother’s domicile is considered.

Those exploring whether they might qualify as a non-dom should consider their father’s domicile position at the date of their own birth and whether they retained that position afterwards.  A domicile of origin can in some circumstances be replaced by a domicile of choice.

It is important to bear in mind that the rules are far from straightforward and will usually require support from a non-dom specialist advisor.   It’s also worth noting that non-doms will also usually be required to complete tax returns in their home country too, which can add additional complexity and costs.

Non-doms often get a bad press unfairly and the overall contribution they make to the UK economy could be said to be undervalued. Greater understanding in this area will certainly help, but we probably also need reforms aimed at encouraging non-doms to spend more time on UK soil, so they are more likely to invest here and make an even bigger contribution to UK tax coffers.

Craig Hughes is a partner and private client adviser at accountancy firm, Menzies LLP. He specialises in advising non-doms and other high-net worth individuals on their financial affairs and compliance matters.

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