Q&A: What is a non-dom?

Businessmen in London
Image caption Non-dom status has been a source of debate for some time

The non-domicile rule, that allows some UK residents to limit the tax paid on earnings outside the country, has been a regular topic of debate in recent years.

Various changes have been made to the way people face charges in the UK if they wish to keep their non-dom status.

Still, the tax status remains, and there is an element of mystery about it - with the number of non-doms in the UK a matter of informed guesswork.

Now the Labour Party has vowed to scrap non-dom status, with some caveats to protect temporary workers, if it wins power in the general election.

What is a non-dom?

A non-dom is a UK resident whose permanent home, or domicile, is outside of the UK.

A domicile is usually the country his or her father considered his permanent home when he or she was born, or it may be the place overseas where somebody has moved to with no intention of returning.

That means somebody can be born, be educated and work in the UK but still hold non-dom status. It also means that some may inherit their non-dom status from their parents.

For proof to the tax authority, they have to provide evidence about their background, lifestyle and future intentions, such as where they own property or intend to be buried.

Key to non-dom tax status is that an individual must pay UK tax on UK earnings, but need not pay UK tax on foreign income or gains unless they bring that income back to the UK.

Has this system been around for a while?

Yes, for more than 200 years.

The FT says it was originally introduced in 1799 and allowed people with foreign property to shelter it from wartime taxes.

It became a regular point of debate during and after the financial crisis when the legal tax affairs of wealthy residents was put under the spotlight.

How many non-doms are there?

This is where things become a little more opaque.

People do not necessarily have to indicate their domicile status on their UK tax return. The UK tax authority believes there was a general trend of rising numbers to 2008 when charges came in, but a fall since.

There were an estimated 114,800 non-doms in 2012-13, according to the latest figures available.

Non-doms have included some super-wealthy household names, but also include some foreign doctors and nurses working for the NHS, as well as some students.

What tax charges do non-doms face?

Image copyright PA

Non-doms who have lived in the UK for seven of the last nine years must pay £30,000 each year to maintain their tax status.

Those living in the UK for 12 of the last 14 years must pay £50,000 to do so.

Non-doms living in the UK for 17 of the last 20 years must pay £90,000 to keep their non-dom status.

About 5,000 people pay these charges, raising an estimated £300m this year for the Treasury.

Some other countries have similar regimes, but the seven-year period of grace is unusual internationally.

What would scrapping non-dom status mean?

There would still be a period of time where temporary workers and students can legally maintain their domicile overseas.

However, the big questions raised by effectively scrapping non-dom status include:

  • Whether there will be a flight of non-doms who paid an estimated £6.2bn in UK tax in 2012-13
  • How much can be raised in UK taxes if former non-doms decide to stay?
  • Will that tax income outstrip the amount raised from non-dom charges? Labour says it would do so by several hundred million pounds but this is very difficult to quantify
  • What will be the effect on jobs and business creation in the UK?
  • Whether this will create a more even playing field among entrepreneurs irrespective of their domicile

The debate is likely to continue whichever party wins the election.

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