Those eligible to claim non-dom status could live in the UK for as long as they liked and would only be taxed on their UK income and not on foreign earnings.
They did not pay Capital Gains Tax when they disposed of overseas assets and, when they died their estate was only subject to UK inheritance tax if they became 'deemed domiciled' because they had been resident for 17 out of the past 20 years. If they were not deemed domiciled they could also make lifetime gifts of non-UK assets without the gift giving rise to inheritance tax.
These advantages meant that for those whoheld the majority of their wealth overseas London acted in effect as a tax haven and had the added advantage of being a dynamic and politically stable world city, a world away from the balmy yet dull islands that are the more usual home to those seeking to shelter their wealth from the taxman.
In fact life was so good that many well-off individuals, even though they had been born and brought up in the UK, elected to be taxed as non-doms. Some were able to do this by taking advantage of a rule that meant those whose father or grandfather enjoyed non-dom status could also benefit themselves. Others, were able to do this because they had acquired a domicile of choice outside of the UK while living abroad, and elected to keep this arrangement going on return to the UK.
The tightening of the rules relating to non-doms began in earnest in 2008, but it is in April next year that the biggest changes of all will be introduced. One change will be that those who were born in the UK to UK domiciled parents will no longer be able to keep their non-dom status when they return to the UK after living abroad.
Another is that paying tax on the remittance basis will no longer be an option for those resident in the UK for 15 out of the last 20 tax years.
The remittance basis was introduced in 2008 when it was decided that those receiving foreign income could elect to either pay a flat annual charge of £30,000 or to pay income tax on their foreign earnings in the same way as all other UK residents once they had been UK resident for 7 out of the last 9 tax years. This charge was increased so that those resident for 12 of the past 14 years must now pay £60,000 and those resident for 17 out of 20 years £90,000.
From April 2017, the remittance basis will no longer be available to those who have been resident in the UK for 15 out of the last 20 tax years. All non-doms resident in the UK for this period will be deemed domiciled in the UK for income tax, capital gains tax and inheritance tax on all overseas assets.
Once an individual is deemed domiciled, it will take six years of non-residence in the UK before they are no longer caught by the 15 out of 20 rule – so if they were here for 15 years for example and then left and returned after say three years, the 15/20 rule would catch them because HMRC look back 20 tax years. However, if they leave the UK and do not return until six full tax years have passed they would have shaken off that deemed UK domicile status and the 15/20 clock would start again from scratch.
For UK doms the position is slightly different. When they leave, their clock (which is three years) starts ticking once they have acquired a domicile of choice elsewhere. HMRC has stated that it is considering aligning these rules so that the periods for both groups are the same.