Demystifying Non-Domiciled residents - who are they, who qualifies, potential reforms and what are the benefits?

19 June 2023

Who are they?

Non-domiciled residents or ‘non-doms’, as they are popularly known, are individuals who live in the UK (have their residence in the UK), but claim tax on their permanent place of residence abroad. Simply put, these individuals do not have to pay UK tax rates on their foreign income.

Who qualifies?

Firstly, it is important to establish the criteria that must be met to attain non-domicile status. To attain non-domicile status, a person must prove that (1) either they or (2) their father was born in another country or (3) that they plan on eventually returning to that country. There are exceptions to these three possibilities and individuals may even qualify if they have various concrete personal links to a country.  For example, if their mother is born in a particular country and the individual’s parents are unmarried. 

The £2,000 threshold

If you qualify as a non-domiciled resident and earn below £2,000 in the tax year, and if that money is not brought into the UK (by transferring to a UK account), then you are completely exempt from paying UK tax on your foreign income or gains. 

However, if you earn more than £2,000, then you must report your foreign income via a Self-assessment tax return and can either pay UK tax or claim the remittance basis. The latter is a complicated concept, as you only pay UK tax on the income you bring into the country (the UK). However, you lose tax-free allowances for Income and Capital Gains taxes and pay an annual charge based on the time for which you have been a UK resident (£30,000 if you have been here for more than 7 of the last 9 tax years or £60,0000 if you have been here for more than 12 of the last 14 tax years). The £2,000 exemption is especially relevant for many migrant workers and low-income households, as claiming non-domiciled status on an annual income of less than £2,000 can lead to substantial tax savings as they are completely exempt on money earned abroad. 

The significant reforms

Political and legal calls to limit the tax benefits of having non-domiciled status resulted in the 2017 reforms, which restricted access to this regime. The two most significant changes are as follows:

• Inheritance Tax will be charged on UK residential property held via offshore institutions.
• Remittance basis of taxation will no longer be available to those who have been a UK tax resident for 15 of the last 20 tax years.
• Furthermore, those who have been a UK tax resident for 15 of the last 20 years cannot apply for permanent non-domiciled status and have to pay the aforementioned annual charge on their incomes.

There have been calls to abolish non-domiciled status, especially given the current economic climate. It has been estimated that while non-domiciled residents contribute nearly £8 billion a year to the UK economy, they save around £10.9 billion through associated income and capital gains on their foreign and offshore income.

While abolishing non-domiciled residents may be touted by some as a viable financial boost to the economy, there is a risk that non-domiciled residents may decide to relocate to tax-friendly jurisdictions and accordingly reduce their considerable contribution to the economy through payment of taxes. The trade-off between income lost through outflow of non-domiciled residents and the payment of additional taxes by those who choose to remain must be carefully managed if such a policy is to be followed. Parallels can be drawn with last year’s windfall taxations as the measure entailed similar trade-offs on a political, social, and economic level that the government had to carefully navigate before asserting the measure.

Here at the Queen Mary Legal Advice Centre, we reached out to partner Nick Dunnell at reputed law firm Farrer & Co, who specialises in private client and tax issues and has written articles in this field. Nick Dunnell’s perspective on arguments to abolish non-domiciled status is as follows:

‘It is uncertain whether, on the abolition of the non-dom rules, there would be  any transitional or grandfathering provisions. These provisions, if they are included in the legislation will have a bearing on whether non-doms stay or leave. As a consequence, there may be more tax due from those who stay (unless they are able to change their affairs to reduce their tax exposure). Some will leave - and whether the exchequer is worse off for their leaving will depend on how much tax they were paying and how much wealth they were generating in the UK.’

For further information on whether you qualify as a non-domiciled resident, please refer to the UK government’s Income tax page and their guidance note. You can also read Nick’s article on Farrer&Co.

By Rishit Singh and Hrishikesh Chaudhuri
First year LLB students at Queen Mary University of London