Rishi Sunak’s wife is benefiting from Britain’s eccentric non-dom rules

In the mystery of the Sunak family’s tax-efficient personal arrangements, I noticed one particularly confusing message. In her statement clarifying her position, shortly after The Independent broke the story, Akshata Murthy’s spokesperson pleaded that she was an Indian citizen, with the implication that she either lives or pays tax in India, or both.

In addition, India doesn’t permit dual citizenship, so, the unspoken argument runs, she hasn’t any choice. Yet citizenship, or residency, for that matter, has no necessary relation to "domicile". It’s not the same as where you live or who you are, in that sense. After 15 years living in the UK, you lose non-dom status, but in any case, there are other ways of shielding income and wealth from taxation in any jurisdiction.

Domicile, in tax law, basically means somewhere you might theoretically have a claim to live, or a claim of origin. So that covers many very high-income foreigners living in the UK. They are mostly bankers, tycoons, football players, top academics and researchers, leading industrialists, oligarchs – that sort of person.

The idea is that even if they don’t pay much tax directly themselves on their foreign incomes (which may include UK income if they can divert it somehow) they spend lots of money, own or support businesses, employ people and thus generate VAT, income tax, national insurance and stamp duty receipts for the Treasury. The tycoon who lives in a mansion Kensington in London, buys a Rolls-Royce and likes to go out-out and do some shopping and entertaining, will be generating incomes for estate agents, accountants, lawyers, butlers, builders, mechanics, retail workers and waiters and chefs – and they all pay tax. So the argument runs.

It runs well in the UK. A study by the London School of Economics and the University of Warwick suggests the number of people who had ever claimed non-dom status in the UK rose from 162,000 in 2001 to 238,000 in 2018. It found that these people were most commonly working in finance, management consultancy and accounting.

But the important point is that “non-dom status” is not necessarily acquired through residency abroad or by acquiring or having another nation’s citizenship, though this has become increasingly common. Around 80,000 people who live in the UK but were born abroad or have foreign-born parents have non-dom status, which affords them generous tax benefits.

The classic non-dom for many years was actually someone who was or is descended from a refugee from Nazi Germany or Austria in the 1930s. This non-dom could thus enjoy non-dom status so even if they’d never set foot outside the UK, never intended to, and were born in Britain and lived there as a UK citizen their entire life. They could, and indeed do, combine non-dom status with offshore trust funds to protect children from future inheritance tax issues (though the rules on offshore trusts have been tightened up).

This meant that someone wealthy enough to need to protect their income generated from money or assets parked overseas in the usual kind of tax haven, could indeed do so. It was and is a very special status.

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Apart from Ireland, the UK is the only country in the world to create this eccentric system, and, of course, many think it unfair. Successive governments have tried to restrict it and impose fees for its use, though still trivial compared to the tax savings. Ed Miliband campaigned to abolish it in the 2015 election. In 2019, the then shadow chancellor, John McDonnell repeated the pledge and asked: “Why should the super-rich get away with it on a spurious scam like this?”

There’s a good reason why non-dom status persists, however, which is simply that there’s no great point in scrapping it. The super-rich can easily avoid UK tax by skipping the country or getting their smart tax lawyers and tax accountants to invent new ways of gauging their riches. This remains the case even after Gordon Brown, as chancellor, introduced a remarkable blanket law requiring such advisers to tell HMRC as and when they come up with new tax avoidance schemes. They may be perfectly lawful in every other way, but if they are contrived to avoid taxation then they have to tell HMRC so they can close them down before they start. Yet still elaborate avoidance goes on. Go figure. It’s a cat and mouse game.

The simple lesson with people such as Akshata Murthy and many others is that if you try to tax them, they’ll pay even less than they do now, and possibly even leave the country, so that they become properly non-resident, and not liable for any kind of UK taxation.

Of course, the wife of the chancellor of the exchequer isn’t going to do that; but, in future, if non-dom status was abolished and she was in line to inherit extreme wealth, the Sunak family might face some tough choices.