What is non-dom tax status and how do Labour want to change it?

Labour’s Rachel Reeves has said her party would go further than the Conservatives on the controversial “non-domiciled” tax status, after Jeremy Hunt officially axed the measure in March’s spring Budget.

Mr Hunt’s announced overhaul to the current system scrapped the effective tax loophole for a much stricter version of it – but Labour has argued that the changes are too lenient and there are still loopholes.

Shadow chancellor Ms Reeves says Labour would tighten the new non-dom rules further, with one party source saying they want to replace the Conservatives’ ‘semi-skimmed’ measure with a ‘full-fat’ one.

The issues around people with non-dom tax status came under the spotlight again last year when The Independent revealed that Rishi Sunak’s wife Akshata Murty dodged millions in UK tax by taking advantage of the loophole.

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Research from the London School of Economics found that scrapping the special exception would raise the government over £3.2bn a year. Their forecast predicts that just 0.3 per cent of people with non-dom status would leave the country in this scenario.

However, the Institute for Fiscal Studies had warned the chancellor to “tread carefully” on removing it.

The research group pointed out that there are around 37,000 people claiming the non-dom tax exception in the UK, still paying a collective £6bn in UK taxes. Any major change, they argue, could see many of them leave the country – taking this revenue with them.

Here, we take a look at everything you need to know about the non-dom status:

First introduced in 1799, and refined over the years, the UK’s “non-domiciled” tax regime has come under scrutiny in recent years.

A “non-domiciled individual” is a person who lives in the UK but is not settled here permanently. They will only pay UK tax on money made in the country, and can avoid paying it on their foreign income if they opt to claim the “remittance basis”.

This allows wealthy individuals living in the UK to elect the lower-tax country as their domicile, making for major savings.

There are two ways you can claim this status. Firstly, if you weren’t born in the UK, or your father came from a different country. The only other way is if you are over 16 and choose to leave the UK to live elsewhere permanently.

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If you are a non-dom and choose not to pay UK tax on your overseas earnings, you must pay:

You can no longer claim non-dom status after you have lived in the UK for 15 of the previous 20 years.

Non-doms that don’t claim the remittance basis will simply pay UK tax on their foreign income (over £2,000).

Several other countries similarly operate a tax system with special rights for non-dom individuals.

Mr Hunt announced the Conservatives’ plan to abolish the “outdated” non-dom tax status in March’s spring Budget, introducing instead a “residence-based” system. While this technically overhauls the system, transitional arrangements means it’s also not quite a complete rug-pull for non-doms living in the UK.

The changes will come into effect from 6 April 2025, when a new foreign income and gains regime (FIG) will replace the remittance basis tax status. This will still allow individuals who come to the UK to avoid paying UK tax on overseas earnings, but now only for four years.

After these four years, they will begin paying the same tax as everyone else.

As part of transitional arrangements, the government has given non-doms the chance to put overseas funds in family trusts before the April deadline, to avoid paying inheritance tax. They will also only having to pay tax on 50 per cent of their overseas earnings in the first year the scheme comes into place.

It is these transitional factors that Labour has taken issue with, with Ms Reeves arguing that scrapping the measures could raise a further £2.6bn, which she says the party would use to fund the NHS and schools.

In April 2023, there were 68,800 non-doms living in the UK, with an estimated 37,000 claiming the special ‘remittance basis’ tax status.

Ms Murty remains a non-domiciled individual as a citizen of India. However, following the revelations of her tax arrangements, Ms Murty opted to begin paying UK tax on all her worldwide income in future and for the 2021/22 financial year.

The prime minister’s wife issued a statement at the time, accepting that her tax status was not “compatible” with Mr Sunak’s political role, and that she appreciates the “British sense of fairness”.

It was estimated she dodged up to £20m in UK tax over several years on her dividends from Indian IT firm Infosys, founded by her father.

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Conservative peer Zac Goldsmith held non-dom tax status until becoming an MP in 2009, when he relinquished it under media and political pressure. He inherited the status from his father.

Other famous non-doms have included: oligarch and former owner of Chelsea football club Roman Abramovich, media mogul Viscount Rothermere, and AstraZeneca CEO Pascal Soriot.