The non dom rule

The Labour Party is considering watering down its plans to abolish the non-dom rule - but what is it, and how did it come about?

The rules were not introduced as a result of rich people lobbying Parliament. They date back to 1799, when the income tax was first introduced.

These were the good days of the British Empire and at a time when most people barely travelled out of their town, let alone abroad. The profit pioneers who risked their lives to bring prosperity to Britain should be encouraged to do so through the tax system.

It was, therefore, decided that any income and capital gains made outside the UK would not be chargeable to tax in the UK until such time as it came across the white cliffs of Dover. This was called the ‘Remittance Basis’ of taxation. Profits made abroad would be taxed in the year they were remitted.

However, all income and capital gains made in the UK were taxed in the year they were made - this was called the ‘Arising Basis’ of taxation.

Following the World Wars, the British Government needed new revenue-raising methods. It reviewed the basis on which income and capital gains were taxed. The Arising Basis of Taxation was changed to apply to all income and capital gains wherever the money was made for everyone for whom the UK was their home country.

However, it was considered fair that people for whom the UK was not home should be taxed in the UK on all the income and capital gains they made in the UK but would continue to be taxed on the Remittance Basis of Taxation for the income and capital gains which they made abroad.

The same exemption was to be made on estate duty, now called Inheritance Tax.

This tax is charged on all gifts made during your lifetime and your entire estate on death. It is payable by the person making the gift or by the estate on death on all investments and assets, wherever they are, by everyone for whom the UK is their home country. However, there is a relief from inheritance tax if the UK is not your home country and on gifts made more than 7 years before death.

The concept of ‘home country ’ was taken from the definition of ‘domicile’, which connects the succession law to a person in the UK. It is taken to be the country where your father considered home when you were born. If you are UK-domiciled, you can give your entire estate to a stranger rather than your spouse and children, which is prohibited in continental Europe.

Income and capital gains are taxed in the UK on people who are ‘resident’, which is a different concept to ‘domicile ’ and depends on the time physically spent within the borders of the UK. This is not a concept which is used by every country. The concepts which link a person to a country’s tax system vary from one country to another. The US raises taxes on its citizens - those eligible to have a US passport, including everyone born in the US, regardless of whether they have a US passport. France taxes its people who have the closest connection to France.

The scope of reliefs for non-dos has been whittled down over the years and is currently only available without a fee for the first seven years of becoming a tax resident in the UK. This is not likely to be reduced to four - but there is time for further U turns!