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Non-domiciled status: What does this mean and why is it important?

Much has been made in the press in the last week of the tax affairs of Akshata Murty, the Chancellor’s wife, and the fact that she claims non-domicile tax status. This has resulted in the usual outcry which accompanies stories designed to imply that the wealthy not paying their fair share of tax. However, this outrage is usually not accompanied by corresponding understanding or knowledge of the tax rules in point.

While we have no connection with Ms Murty, nor an in-depth understanding of her personal tax position (private information that has been leaked to the press in what can only be described as a low blow by person or persons unknown), in the interests of fairness we thought we should explain her position, and the tax rules that apply.

What is domicile?

Domicile is a concept of law and identifies where a person is ‘from’. It is completely distinct from residence for tax purposes, which is based primarily on where a person spends most of their time. A person’s domicile is generally determined by reference to the birth country of their father, in Ms Murty’s case, her Indian father. An individual can elect to change their domicile; however this is difficult to achieve as it involves demonstrating that almost all links to the domicile of origin are severed and effectively all aspects of a person’s life have been transferred to another jurisdiction. Reports, therefore, that Ms Murty has ‘chosen’ a domicile in India are therefore incorrect; she has merely, to date, not chosen a domicile of choice in the UK.

Why is domicile status important?

The domicile rules are complex and have undergone several changes in recent years. Two of the main advantages they have typically given to non-domiciled UK tax residents are:

  • Ability to keep offshore income outside of the UK tax net if it is not remitted to the UK i.e. brought here to spend or invest. (UK-domiciled and UK resident taxpayers pay tax on all worldwide income regardless of whether it is remitted).
  • Protection from Inheritance Tax – estates of non-domiciled individuals are only subject to IHT on the UK-situs assets, whereas estates of UK domiciled individuals are subject to IHT on worldwide assets.

The remittance basis

While this income tax treatment is available to non-UK domiciled individuals, it only applies where a ‘remittance basis’ claim is made, and the relevant fee, if any, accounted for. Once a non-domiciled individual has been UK resident for seven of the last nine tax years, they must pay a £30,000 annual charge to claim the remittance basis, rising to £60,000 when they have been UK resident for 12 of the previous 14 tax years.

Depending on the level of offshore income, it may be preferable to pay the remittance basis charge than to pay UK tax on the normal arising basis. This will be the case if the tax liabilities arising on remitted income would exceed the remittance basis charge and is also likely to be preferable if the individual does not need to remit offshore funds to the UK to fund investments or their lifestyle. This, according to reports, is the situation Ms Murty is in, as she pays the £30,000 charge which means that no UK tax is due on Indian dividends as long as they are not remitted to the UK, which would otherwise result in income tax charges of several million pounds.

Individuals who have been resident in the UK for 15 years or more will be considered ‘deemed domiciled’ in the UK for income and capital gains tax purposes, such that from this point onwards Ms Murty will be liable to pay UK tax on her worldwide income and gains, including dividends form Indian companies.

Why does it matter?

Everyone has their own view on the fairness of the tax system and whether the wealthy should contribute more than they currently do and the potential corresponding impact on the Treasury and on foreign investment in the UK. However, the key point to note in relation to Ms Murty’s position is that it is simply incorrect to label her tax affairs as ‘avoidance’ in the context of the tax morality debate or her behaviour. This is a completely different scenario to, say, a high-profile celebrity being involved in an aggressive tax avoidance scheme. Regrettably, the media appear happy to approach both situations from the same angle, which is at best ill-informed.  There is no suggestion whatsoever that she has acted illegally or even controversially, and newspaper headlines using words such as ‘avoidance’ and ‘loophole’ are unhelpful and unfair.

Nevertheless, domicile is intended to reflect one’s spiritual ‘home’ and it therefore suggests that the wider intentions of the Sunak-Murty family are indeed to leave the UK at some future point, whether or not this is tax-related. It also calls into question the Chancellor’s personal motivation to reforming the non-domicile system of taxation when his own household is benefitting handsomely from the continued existence of these rules. Whether this new scandal will affect treasury policy in the months and years to come remains to be seen.

Finally, Ms Murty has now agreed to refrain from claiming non-UK domiciled status on her income and gains, which will increase her UK tax bill and presumably dampen the vitriol against her husband. Note that there has been no suggestion that she will make her domicile of choice in the UK, thereby leaving her with the open option to make the annual remittance basis claim, as well as benefit from any other tax advantages on an Indian domicile, quite legitimately in future.

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