Highlights

  • Sunak writes to UK PM for a review
  • Akshata Murthy to pay tax on overseas earnings
  • Sunak's 'Green Card' issue creates furore

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What is a non-dom status that has been troubling Rishi Sunak

Non-domicile, or non-dom, is a British tax status that allows a person who was born in another country, or if their parent is from another country, to pay tax in the UK only on their UK income.

Rishi Sunak, the British Politician, is currently seeing a lot of criticism after it was revealed that her wife Akshata Murthy, who is also the daughter of Infosys founder Narayana Murthy, is a non-domicile who doesn't pay taxes. Non-domicile is also called non-dom.

What does non-dom status mean, and how do you claim it?

Non-domicile, or non-dom, is a British tax status that has been available since the French revolution – yes, that long. It allows a person who was born in another country, or if their parent is from another country, to pay tax in the UK only on their UK income. The system has allowed wealthy foreign immigrants to enjoy all the benefits of living in the UK, while paying very little in UK taxes because they make the bulk, if not all, of their income abroad.

The regime can be used, or sometimes abused, by foreigners, or British citizens, to avoid paying taxes altogether. While in principle they are required to pay tax in the countries where income is earned, the fact that they live (and are tax residents) in the UK makes it easier to arrange their affairs and end up paying little or no tax at all.

The result is that many of the wealthiest families living in the UK are not contributing to direct taxation in the UK. The claim is that the system is still useful because these people tend to contribute indirectly, maintaining a small army of servants and service providers, who themselves pay income tax. Non-doms may also pay VAT on expensive goods and services in the UK.

The system was reformed in 2015 and became more complicated. Non-dom is now restricted to 15 years. The reforms effectively shrunk the number of people claiming non-dom status. Now, only the very wealthy tend to do so. Many move out of the UK after 15 years for five years, and then return and claim another 15 years of non-dom.

Why do people claim non-dom status?

The only reason people claim non-dom status as opposed to being ordinary British tax residents is if they calculate that they will end up paying less tax on their worldwide income. Either because taxation in their country of origin (or where income is earned) is so much less than in the UK, or because they can avoid paying taxes at all.

Murty reportedly earns £11.5 million in annual dividends from her stake in her father’s IT business, which is based in India. Her non-dom status means she does not have to pay UK taxes on these earnings.

Someone without non-dom status earning this much in the UK would have, in the last year, paid close to £5 million in income tax in the UK, plus another £250,000 in national insurance contribution. Indeed, her husband’s rise in national insurance would have cost his household an additional £150,000 or so in taxation had she not declared herself non-dom.

Does your nationality or citizenship determine your non-dom status?

A statement from Murty’s spokesperson suggests that being an Indian citizen is what results in her non-dom status: Akshata Murty is a citizen of India, the country of her birth and parents’ home. India does not allow its citizens to hold the citizenship of another country simultaneously. So, according to British law, Ms Murty is treated as non-domiciled for UK tax purposes. She has always and will continue to pay UK taxes on all her UK income.

If Murty lives in the UK, she is a tax resident in the UK. The fact that she is an Indian citizen is not relevant – non-dom status is a choice. The mention of her Indian citizenship provides some justification for claiming non-dom status, maybe by suggesting that she genuinely wishes to return to India at some point in the future.

So, non-dom status is effectively a declaration that you intend to move (or move back) to where you are domiciled? While it is not a binding commitment, claiming non-dom status can be seen as effectively an indication that you are planning at some point in the future to return to where you are domiciled. Of course, the taxpayer may change their plans, and can only claim non-dom status for so long.

After someone has been in the UK for seven of the last nine tax years, they must pay a fee of £30,000 to maintain non-dom status (as Murty does). After 12 of the last 14 tax years, the fee is £60,000. And once someone has lived in the UK for 15 years, they become automatically domiciled. Murty is understood to have moved to the UK in 2015.

Sunak supported this state of affairs in comments to The Sun, saying: “That’s where her family is … ?that’s where she, you know, ultimately will want to go and look after her parents as they get older.” Can HMRC challenge someone’s non-dom status? Her Majesty’s Revenue and Customs (HMRC) cannot do anything about it, only parliament can. Just as George Osborne, when he was chancellor, reformed the system in 2015, the one person who can change the system is the current chancellor of the exchequer.

From a tax perspective, this story is fairly simple. The issue is not tax per se, but the implication of taking advantage of this archaic (albeit reformed) rule originally understanding that you will or might be “returning home” at some point.

When a feature like this is taken advantage of by none other than the spouse of the chancellor, it contributes to the view that the UK’s tax haven-esque features are intentional government policy. It doesn’t look good, and gives the impression that in Sunak’s case, the UK has appointed a cat to take care of the milk.

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