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27 October 2023

Non-Dom tax status: is it really a “200-year-old loophole”?

Michael Parkinson ‒ tax, trust and estate planning specialist in our Private Client Team ‒ takes a frank look at the history behind one of the most intensely debated pieces of legislation in the UK today.

“It is a 200-year-old loophole that should have no place in our modern tax system”; those were the words used by James Murray MP, the Shadow Financial Secretary to the Treasury, to describe non-domicile tax status during an Opposition Day debate in Parliament earlier on this year.

From a tax historian’s perspective, that description is certainly open to challenge.

It is true that “remittance basis” of taxation (which Mr Murray was referring to) dates back to the original introduction of income tax in the UK in 1799.  The remittance basis is a pretty simple concept; in broad terms, UK tax residents who are eligible for the remittance basis pay tax on their UK source income and capital gains as they arise in the normal way but foreign source income and gains are only taxable in the UK if they are brought (i.e. remitted) to the UK.

If you exclude the years in the 19th century when income tax was repealed, the remittance basis hasn’t quite reached its bicentenary (by my reckoning it’s clocked up 197 years of operation) but some modest rounding up can probably be forgiven.  Less forgivable is the inference that the remittance basis has only ever been available to non-UK domiciled individuals.

In fact, domicile was completely irrelevant for income tax purposes until 1914; prior to that, the remittance basis was available to all UK tax residents.  In 1914, the government decided to restrict the remittance basis to persons who were not British subjects (but only for income from stocks, share and rents – the remittance basis continued to apply to all UK residents in respect of other sources of foreign income); in other words, citizenship was originally supposed to be the determining factor.

It was during the committee stage of the progress of the 1914 Finance Bill through Parliament that domicile was substituted for citizenship and became relevant for income tax purposes for the first time.  This was no accidental loophole; it was the express will of Parliament that individuals domiciled outside the UK should continue to be entitled to the unrestricted remittance basis.

For UK domiciled residents, the remittance basis was then restricted further in 1940 and 1956, before effectively being abolished altogether in 1974.

Non-doms meanwhile continued to be entitled to the unrestricted remittance basis on foreign income.  Moreover, when capital gains tax was introduced in 1965, the remittance basis was extended to foreign gains arising to non-doms; again, this was the will of Parliament, as expressed in the provisions of the Finance Act 1965, and not some oversight or accident.

Whether or not non-dom tax status has a place in our modern tax system will ultimately be a question for Parliament to determine; but it isn’t a loophole and is only(!) 109 years old…

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Michael Parkinson
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