Five things: Non-dom tax rules

Five things: Non-dom tax rules

The Labour party recently made the pledge to reform the tax rules for non-domiciled (‘non-dom’) UK residents, taking away their ability to exempt offshore earnings from UK tax. This could prompt many wealthy UK residents who are domiciled in another country to move to a more favourable tax jurisdiction, such as Switzerland or Malta.

The government defines non-domiciled residents as those who have their permanent home outside the UK, and therefore may not have to pay UK tax on foreign income. These residents can live in the UK, but not pay UK tax on their overseas earnings.

Independent financial advisory firm deVere Group said that it has already received enquiries from some non-dom clients in regards to leaving Britain if Labour wins the election. Many voters may feel that they agree with the end of non-dom status, but may misunderstand the details behind this tax status.

Here are five things to do know about non-doms...

1. How does someone become a non-dom? It is possible to live in the UK but be domiciled in a different country – it is different from having a nationality or citizenship. A domicile is usually defined as the country the person’s father considered to be their permanent home and can be passed down the paternal lineage, but it can sometimes be a place overseas where someone has moved to with no intention of coming back. This tax rule was introduced about 200 years ago as a way for people with foreign property to avoid wartime taxes.

2. How can someone who is a UK resident not pay tax here? Non-dom individuals pay tax on income and gains made in the UK, but only pay tax on income and gains made abroad that are remitted to the UK. This means that these individuals do have to pay UK tax on UK earnings, but no not pay UK tax on earnings overseas, unless they bring the gains back to the UK.

3. How many people in the UK are considered to be non-doms? According to the most recent tax figures available, there are about 114,800 UK residents who have claimed non-dom tax status. The reason it is difficult to provide an exact number is because it is not required to state non-dom status on a UK tax return. It is also required for non-doms who have lived in the UK for at least seven of the past nine years to pay £30,000 per year to keep their tax status, £50,000 for those who have lived in the UK for 12 of the last 14 years, and £90,000 for those who have lived in the UK for 17 of the past 20 years.

4. What are the consequences of non-doms leaving the UK? Getting rid of this tax status could mean that a number of people may decide to move elsewhere for a more favourable tax jurisdiction. It has been estimated that non-doms paid about £6.2bn during the 2012-13 tax year. About 6,000 paid the fee in 2011, and there are approximately an additional 43,000 who do not pay the fee now because they haven’t been in the UK long enough, but could in the coming years. This overhanging question is whether or not getting rid of this status and making these people pay regular UK tax on all earnings will bring in more money for the government than the maintenance fees for their non-dom status would generate.