Non-dom Tax Guide: Who Qualifies and What Are Their Options?

The ‘non-dom ding dong’ between Prime Minister Rishi Sunak, whose wife is a non-dom, and Labour leader Sir Keir Starmer, who is proposing to scrap non-dom status, has helped to keep the issue in the headlines. Andrew Robinson of DSW Tax Advisory, who advises many high-net worth clients, explains which rules apply, who the non-doms are and what they should do now.

What is a non-dom?

Non-domiciled individuals are people who are living in the UK but whose ‘domicile’ – or the country they feel they belong – is overseas. Usually they were born overseas or have a father from another country, though a small number are former UK nationals who have chosen to make their permanent home elsewhere.

Non-doms only have to pay UK tax on money they have earned in the UK, and not on their income from overseas, unless it is transferred to the UK (known as remittances).

However that does not mean they avoid tax on their overseas wealth altogether – usually they will still have to pay tax in the country where their assets are situated.  Therefore what they pay will depend on the tax regime in that particular country.

Nevertheless there can be considerable savings if taxes are lower than in the UK, for example in the Channel Islands which has a low-tax regime or Dubai where there is no income tax at all.

Who qualifies for non-dom status?

Individuals have to prove to UK tax authorities that their domicile is overseas, which may involve providing evidence on their family background, if challenged by HMRC. Various restrictions have been introduced over the years, most recently in 2017 when the Conservative government ended ‘permanent non-dom status’.

Now anyone who is resident in the UK for 15 of the previous 20 years can no longer claim non-dom status, and neither can those who were born and originally domiciled in the UK and who have been resident here for at least a year since 2017.

Since 2008, when a system of annual charges was introduced, non-doms also have to pay for the privilege. The current charges start at £30,000 for those who have lived in the UK for seven out of the last nine tax years, rising to £60,000 for those who have lived here for 12 out of the last 14 tax years. Some non-doms, especially those with low income from overseas, choose to pay UK tax on all their earnings as the annual charge would outweigh any benefits.

Who are the non-doms?

According to research by the University of Warwick and London School of Economics (LSE), more than 93% of non-doms were born abroad, while 4% had lived abroad for a lengthy period. Most are from Western Europe (especially France), India and the US. Contrary to popular belief, the number from Russia and the Middle East remains relatively small.

The study also found that around 80% had income from some type of work, rather than living off their investments. Most non-doms lived in or around London, with a lower concentration in Oxford and Cambridge. More than one in 10 adults in Kensington, the City of London and Westminster were, or had been non-dom and one in five top-earning bankers was also a non-dom.

According to HMRC, there were 68,800 non-doms in the UK in the tax year ending in 2022, and between them they contributed around £8.5bn in income tax, capital gains tax and National Insurance contributions to the Treasury. One of the most prominent non-doms is Prime Minister Rishi Sunak’s wife Akshata Murty, who agreed to pay UK taxes on her overseas earnings after her status was revealed.

Do other countries allow non-dom status?

Many other countries offer some type of tax breaks to attract high earners. After David Beckham moved to Real Madrid in 2003, the Spanish government introduced the Beckham law, which enables ex-pats to avoid paying tax on foreign earnings for up to 15 years by paying a one-off sum of €100,000. Cyprus, Malta, Ireland and Portugal also offer similar arrangements.

What would be the impact of removing non-dom status?

The University of Warwick and LSE researchers estimated that removing non-dom status would raise more than £3.2 billion each year – the figure quoted by Labour leader Sir Keir Starmer. They claim that, far from attracting money to the country, the current tax rules act as a disincentive for people to invest in the UK and that only 0.3% of those affected would leave the country if the rules were changed.

However critics have claimed that the research does not take account of the total value of non-doms to the UK economy and many advisers claim it would lead to an exodus and create a negative impact, with the loss of revenue from leavers exceeding any additional revenue gained. Chancellor Jeremy Hunt has also expressed caution about introducing any measures which could damage the attractiveness of the UK.

What should non-doms do now?

In practice introducing new tax legislation is likely to take some time. Even if there is an election in late 2024 and Labour gets into power, it is likely to be 2026 at the very earliest before any Bill would pass through Parliament, gain Royal Assent and the changes could come into effect.

However non-doms may want to assess their position and take professional advice to consider what impact the removal of non-dom status might have. Restructuring your portfolios, the creation of trusts and other entities, and gifting assets are amongst a range of options for those who want to stay in the UK. Those considering a move need to fully understand the tax regime in their new destination before making a decision.