Non-dom status is a controversial subject that usually regards the taxes paid by wealthy foreign nationals who live – and often work – in the UK, though it can also refer to UK nationals who live abroad. Despite its controversy, it is entirely legal in British law.
Gaining non-dom status doesn’t come cheap, and it relies on the claimant to have significant amounts of money coming from foreign sources, so it is only for a highly select group of very wealthy individuals.
But what exactly are non-doms? How can you become one? And why would anyone choose to have non-dom status?
We are going to take a look at these questions as we explore one of the most controversial tax loopholes in the UK’s taxation system.
What is a non-dom?
‘Non-dom’ is an abbreviated term for ‘non-domiciled individual’. The term refers to a UK resident whose official permanent home (their domicile) is outside the UK.
Regarding taxation, someone with non-domiciled tax status only needs to pay tax on the money they earn in the UK. They do not need to pay tax on any money that they earn outside of the UK unless they deposit it into a UK bank account.
So let’s jump in and take a look at why anyone would choose to claim non-dom status.
Why do people claim non-dom status?
Many wealthy individuals have multiple income streams from different parts of the world. For these individuals, non-dom status offers the opportunity to save large amounts of money on tax if they officially domicile in another country with significantly lower taxes.
Let’s say you have a full-time job in the UK and you own a house here that you live in for most of the year, but you were born in America and you have American citizenship and have claimed non-dom status. You also have shares invested in a company in America that yields more income than your full-time job in the UK, and the proceeds of which you keep in an American bank account.
In this scenario, you would pay full Income Tax on your UK job earnings, but you would pay the American rate of Capital Gains Tax whenever you sold your shares.
This would also be true if you didn’t have a job that provided you with income in the UK. And for some people, claiming non-dom status means they can avoid paying taxes altogether.
So, one of the main reasons someone would choose to claim non-dom status is to save large amounts of money on their tax bills.
However, there are also British people who claim non-dom status, as it is possible to do so as a British person provided you actually live in another country.
How to claim non-dom status
In the UK, there are two ways you can claim non-dom status. You can be a:
- Domicile of origin. This is for people who were born in a different country or for people whose fathers came from a different country. Crucially, it is not for people whose mother is from another country.
- Domicile of choice. This is for people who are over the age of 16 and choose to leave the UK and live in another country. You must then have a residence in that country and an intention to remain there indefinitely.
However, in 2017 the rules around non-dom status were changed. As per the new rules, you cannot claim non-dom status if you have been a UK resident for 15 of the past 20 years or if any of the following conditions apply to you:
- you were born in the UK
- your domicile of origin was in the UK
- you were resident in the UK for at least a year since 2017.
Of course, you can still pay UK taxes on foreign income as not everyone who is eligible to claim non-dom status does so.
Do non-doms have to pay for their status?
Although being a non-dom can save wealthy people millions in tax bills, there are still fees they must pay to the UK government for their status. The annual charges for non-doms are:
- £30,000 if you have lived in the UK for at least seven of the previous nine tax years.
- £60,000 if you have lived in the UK for at least 12 of the previous 14 tax years.
- If you earn less than £2,000 a year from foreign earnings and you do not bring that money into the UK you do not have to pay anything.
As we have already seen, non-doms must still pay full tax on their UK income.
Why are non-doms controversial?
Non-dom status is a highly controversial subject because many people believe that those who live in the UK and earn large sums of money should pay taxes here as they will undoubtedly make use of services provided by taxes – roads, street lights, hospitals, emergency services, etc.
It is also seen in a more general sense as further means for wealthy people to be able to avoid taxes that less wealthy people must claim.
The subject of non-doms was recently brought back into the limelight when it was revealed the Chancellor of the Exchequer’s wife claimed non-dom status and had avoided paying millions of pounds in taxes on earnings she made from her father’s company in India.
How many non-doms are there in the UK?
The latest figures from the UK tax authorities regarding non-doms date back to the end of the tax year in 2020, when there were 75,700 people claiming non-dom status in the UK. This was down slightly from the previous year when there were 78,600 in the UK in total.
Over 40% of UK earners in the £5million to £10million income bracket have non-dom status.
Most non-doms in the UK are from America, India, Australia, South Africa, Canada, and Western European countries. However, since 2001, there has been a rise in the number of non-doms from China and Russia.
Summary
Non-doms are UK residents who regard their home to be in another country and receive foreign income on which they do not pay UK tax. Although they must still pay a fee to the UK government to receive their status, non-doms remain a highly controversial subject in the UK.
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