Here's Why Rishi Sunak's Wife's "Non-Dom" Tax Status Is So Controversial

Murthy’s status means she is not liable to pay UK tax on overseas earnings as well as a host of other types of income.

This preferential tax regime known as “non-dom”, which The Independent has calculated could have saved Murthy millions, has been heavily criticised over the years, and despite considerable changes to how it operates, it remains an attractive proposition for wealthy individuals coming to live in the UK from abroad.

Murthy, who is an Indian citizen, has stressed she pays tax on her income from UK businesses, and there is no suggestion any laws or rules have been broken. 

Conservatives politicians including the environment minister Lord Goldsmith gave up their non-dom status after facing criticism for it. 

Here's exactly how it works:

What is a ‘non-domiciled’ individual?

The concept of someone’s ‘domicile’ is distinct from their residence, and refers to the place that is considered to be the person’s jurisdiction of origin.

According to government guidelines: “Your domicile’s usually the country your father considered his permanent home when you were born. It may have changed if you moved abroad and you do not intend to return.”

While in practice it is unlikely a person born outside the UK will ever become domiciled here, unless they show clear intention to live the rest of their life in Britain, a change to the rules in 2017 meant that somebody who has been a resident in the UK for 15 of the previous 20 tax years will automatically be deemed UK domiciled for all tax purposes.

This move was meant to prevent the favourable tax regime from being available to people indefinitely.

What does that mean for paying tax in the UK?

Non-doms are not required to do anything if their overseas earnings are less than £2,000 in the tax year, and you do not bring the funds into the UK, for example by transferring them to a UK bank account.

If the earnings are above £2,000 they must be declared to HMRC in a self assessment tax return and the person can either pay UK tax on them – although they could also then claim some it back through a tax relief scheme to prevent double taxation on the same earnings – or the person can claim the "remittance basis”.

The latter option means you only pay UK tax on the income or gains you bring to the UK, but in return you lose the tax-free allowances for income tax and capital gains tax, and you pay an annual charge of either £30,000 or £60,000 for the privilege.

But given the personal allowance before you pay any tax on income is around £12,000, and the potential savings of not paying any tax on overseas earnings could run into the millions for a very wealthy individual, retaining non-dom status is a major incentive for those with large sources of revenue abroad.

Non-doms also receive a beneficial arrangement in terms of Inheritance Tax, with only assets in the UK subject to the charge – which is typically 40% – meaning a potentially large saving when inheriting overseas property and business interests.

How widespread is non-dom status?

According to new analysis of HMRC data this week, more than one in 10 residents of some of London’s wealthiest neighbourhoods have claimed non-dom status at some point.

The study by the London School of Economics and the University of Warwick found the number of people who had ever claimed it in the UK rose from 162,000 in 2001 to 238,000 in 2018.

But in two parliamentary constituencies that year – Kensington and the Cities of London and Westminster – non-doms made up more than 12% of people living there.

The study, titled “The UK’s ‘non-doms’: Who are they, what do they do, and where do they live?”, analysed the anonymised personal tax returns of everyone who claimed non-dom status between 1997 and 2018.

When it comes to the top earners in the UK, of people whose annual income was more than £125,000, two-fifths are non-doms, showing how attractive the policy is to the wealthy.

How does this apply to Murthy?

The fashion-designer daughter of an Indian billionaire, Sunak’s wife holds director titles at capital and private equity firm Catamaran Ventures, luxury gym chain Digme Fitness, and gentlemen's outfitters New and Lingwood in the UK, according to her LinkedIn profile. 

But it is Murthy’s 0.93% stake in her father’s global tech firm Infosys, worth approximately £690million, that is relevant to her non-dom status.

It has not been confirmed exactly how much she has saved in taxation, but her dividends from the firm reportedly came to £11.6million last year.

UK resident taxpayers pay 38.1% in tax on dividend payouts, meaning if she was not a non-dom she would have to give more than £4.4million of that to HMRC.

It is understood Murthy has been living in the UK for nine years after she and Sunak met at university in California.

It means she would lose her non-dom status in six years if she remains living in the UK.

How has Murthy responded?

A spokesperson for the Murthy stated that she is a citizen of India, where both she and her parents were born. 

“India does not allow its citizens to hold the citizenship of another country simultaneously. So according to British law, Ms Murthy is treated as non-domiciled for UK tax purposes," the spokesperson explained. 

"She has always and will continue to pay UK taxes on all her UK income.”

But the suggestion that she must automatically be given non-dom status as a result of her Indian citizenship has been questioned by tax experts, with Professor Richard Murphy of Sheffield University insisting that the status is in fact a "choice" she can relinquish.

The academic, who co-founded the Tax Justice Network, said: “Domicile has nothing to do with a person's nationality."

He pointed out that non-domiciled status “is given to no-one if they do not apply for it”, meaning that Murthy “is only non-domiciled because she asked to be so”, and she could give it up at any time if she wanted.

How has Sunak responded?

Sunak has not commented on his wife's tax arrangements, but he is believed to have declared her non-dom status when he first became a minister in 2018.

The Chancellor was questioned last month over Murthy's shares in Infosys – which has operations in Russia – and said he had “nothing to do with that company”.

“My wife is not an elected politician,” he said, and has since lamented what he believes to be an "attack" on her by the media over the issue. 

He was clearly unhappy with the line of questioning, and when appearing on a BBC podcast compared himself to the actor Will Smith, saying both of them were “having our wives attacked” after Smith’s wife Jada was the butt of jokes by the Oscars’ host Chris Rock.

Sunak joked that unlike Smith he “didn't get up and slap anybody”.

But, he told Newscast: "I think it's totally fine for people to take shots at me. It's fair game. I'm the one sitting here and that's what I signed up for.

"It's very upsetting and, I think, wrong for people to try and come at my wife, and you know, beyond that actually, with regard to my father-in-law, for whom I have nothing but enormous pride and admiration for everything that he's achieved.

"And no amount of attempted smearing is going to make me change that because he's wonderful and has achieved a huge amount."

However, following mounting pressure, Infosys announced several days later that it was “urgently” closing its office in Russia.

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