How a colonial era holdover allows the ultra-rich to pay far less tax than a typical British citizen while remaining within the law

Non-domicile – usually abbreviated to non-dom – status is a unique quirk of the UK tax system not shared by any other country. It allows ultra-wealthy individuals to be born, raised and reside in the UK, but still pay far less tax than a typical UK citizen, perfectly legally.

The rule, a colonial era holdover that has never been formally codified in statute, is based on the principle that people may live in the UK but regard a foreign country as their true home, the country in which they intend to die.

Eligibility relies on showing that either the non-dom, their father or grandfather (in a sexist twist, their mother or grandmother being born overseas does not generally grant eligibility) was born overseas.

It also requires that the non-dom regards that country as their home, a fact they can demonstrate to HMRC through property holding, a burial plot or other means. As non-dom status isn’t defined anywhere in the UK’s laws, the criteria for claiming the status are ill-defined, complex and change substantially year-to-year.

The non-dom is not required to spend any amount of time in the country they claim as their true home, or to be tax-resident (or indeed pay any tax) to that country. They are also entitled to spend as much of each tax year as they wish in the UK – there are no residency requirements.

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If an ultra-wealthy individual can convince tax authorities of their status, the advantages can be substantial. UK citizens are required to declare and pay UK tax on all their worldwide income. Non-doms need only pay tax on their UK income – meaning if they have investments or offshore bank accounts, they can legally leave these undeclared, and pay no UK tax on the balance.

Because the status can be claimed through the overseas birth of a parent, a person can be born, educated and work in the UK, but still legally pay far less tax than his neighbour through non-dom status. Such individuals are generally referred to as hereditary non-doms.

Non-dom status can also be used to help the ultra-rich legally avoid inheritance tax, though this can require the additional use of offshore trusts for people who have lived in the UK for a long time: provided an offshore trust is set up within 17 years of living in the UK, the assets it contains are not subject to inheritance tax.

Reforms to the system made under the last Labour government, and expanded on by George Osborne, now require those who have been resident in the UK for many years to pay a flat fee of up to £90,000 a year to take advantage of the status (known as paying tax on a remittance basis), meaning it is effective only for the super-wealthy.

Regardless, in the tax year 2012/13 – the latest for which figures are available – more than 113,000 people continued to claim non-dom status.