The Labour Party is considering whether or not to eliminate non-domicile status in the UK (see here). Whilst there may be arguments to eliminate this status, there are also some important reasons not to. These arguments should not be forgotten simply due to the current political climate. It may be better to consider reforming the law on deemed domicile to make it catch individuals sooner instead of eliminating it altogether.
What is Domicile?
At its root, a person’s domicile is their permanent home. It differs from residence in that it is meant to consider more than where a person may be living at any particular time. For more, please read my in-depth analysis here.
Why does Domicile matter for UK tax purposes?
Domicile is particularly important for UK tax purposes because the UK uses two different bases upon which to tax individuals. The UK looks at both an individual’s domicile and residence in establishing to what extent they are liable to pay UK tax.
Where an individual is both domiciled in the UK and UK resident, they will be subject to UK tax on their worldwide income on the arising basis. This means that they will be taxed when the income arises, as opposed to when it is brought to the UK.
This can be contrasted with the remittance basis which can apply to individuals who are UK resident but domiciled outside of the UK. If a person chooses to be taxed on the remittance basis, they will only be taxed on the income which they actually remit in the UK. In this context, remit is widely defined, but at its most basic, it means that the person brings the income to the UK.
Individuals domiciled outside of the UK also have the opportunity to pay less inheritance tax. Their assets located outside of the UK generally will not be subject to UK inheritance tax provided they are neither UK domiciled nor deemed domiciled.
Why was the non-domiciled status originally introduced?
Non-UK domicile status was introduced by Pitt in 1799 when income tax was introduced. It was aimed at protecting the wealth of individuals living in Britain who had significant earnings outside of the UK.
Why should non-domicile status be maintained?
In my view, the non-domicile status does ensure fairness in circumstances where it is not being abused. If you consider a lot of the individuals who take advantage of it, they are multinational people who live in the UK for a certain amount of time but earn a significant amount of their income in other countries where they may be paying tax.
The difficulty is that the only time non-domicile status is talked about is when we are looking at individuals who abuse it in a high-profile way. It is easy to think of circumstances where an individual really should not be able to take advantage of this favoured tax status. For example, where they have lived in the UK for a significant amount of time (at least 10 years), formed a life here and really any suggestion that they intend to leave is quite farfetched.
So what can be done?
Whilst the deemed domicile rules attempt to deal with this issue to some extent, it does still allow those who have lived in the UK for a significant amount of time to get a favoured tax status by paying a fee though the fee is likely to be relatively small compared to the tax saving. In some circumstances, it may be that the correct answer to the question is a closer examination of the lives of the individuals claiming to be non-UK domiciled. It may be that in reality, they have obtained a UK domicile as a matter of general law.
It is important for those individuals who have lived here for an extended period to take advice to ensure that they are correctly claiming the non-dom status.
When is it appropriate for individuals to claim they are non-doms?
For income tax…
There are situations, however, where it is clear that the non-domiciled status is appropriate. This would be where an individual comes to the UK for a relatively short amount of time and maintains many ties with their original country. For work reasons or family reasons, they may be required to be in the UK but ultimately, they are only planning a relatively short stay. There, it is arguably not appropriate for them to pay UK income tax on their foreign assets which they never get to enjoy in the UK.
For Inheritance tax…
The non-domicile status becomes more important when considering inheritance tax. Without it in relation to inheritance tax, a person who lived in the UK for a very short amount of time with no intention of remaining here permanently could pay UK inheritance tax on their assets. Whilst there is nothing wrong in principle with having to pay inheritance tax in the UK, the amount of inheritance tax payable is relatively high and the threshold at which it starts is relatively low. This can be contrasted with the position elsewhere in the world (including, for example, the US), where the threshold to start paying it is comparatively high.
Is the status really necessary to encourage high net worth individuals to come here?
Individuals will often say that one of the key reasons to retain the non-domicile status is to encourage entrepreneurs or other high net worth individuals to come to the UK and invest in the UK even if they do not intend on staying here forever. With a friendly tax regime, it is less of a difficult step for them to be able to come here. I consider that this argument is helpful. Without this regime, those individuals would be more inclined to invest in countries with lower tax rates.
Against this, some make the point that many other places that attract top talent (including, for example, the US) do not have a non-domiciled status and have high tax rates, and people still choose to live there. What is important to consider about places, like the US, is that they have a very different system of taxation. Looking purely at the US, there are more opportunities for excluding the foreign income provided tax is paid elsewhere and more generally there are more deductions etc that can be taken off of income which are not available in the UK.
So, again, what can be done?
Without the non-domicile status, the UK would likely need to consider an alternative method of ensuring that it does not tax individuals with significant worldwide investments so highly that they do not want to move to the UK for any amount of time.
One important point that is not often discussed is the reality of whether every person claiming to be non-domiciled is actually not domiciled as a matter of general law. Perhaps there needs to be greater consideration around the tests for establishing whether or not someone really does or does not intend to reside in the UK permanently.
Alternatively, consideration could be given to lessening the amount of time a person can live in the UK and still claim they are not UK domiciled.
Ultimately, I consider a bad step to take would be to eliminate the status altogether. Whilst it may seem unfair on the face of it, for the truly international individual, it seems equally unfair to immediately catch all of their worldwide income because they are working in the UK for a few years. We should want these people to want to come to the UK and contribute to the economy.