The Labour party has announced today that if it forms the next government after the General Election it will ''abolish non-dom tax rules''.
Under the current rules individuals who are resident in the UK but domiciled elsewhere (‘non-doms’) can elect to be taxed on their overseas income and capital gains by reference to the amounts remitted to the UK (the ‘remittance basis’), rather than by reference to the total amounts arising. A remittance basis charge varying from £30,000 to £90,000 may be payable by longer-term residents as the price of using the remittance basis.
The Labour party has stated that it would abolish this system except for those who are ''genuinely resident in the UK on a temporary basis – like students, or people living here for a short time on business.'' It has indicated that it will consult on the details.
Comment in the media has reflected a number of misunderstandings about the current rules.
- In broad terms an individual is domiciled in the country that constitutes his permanent home – the place to which he intends eventually to return. This is normally the country of birth or nationality, but not necessarily so; the position is determined by reference to the totality of an individual’s circumstances. Domicile status is not purely a tax matter; it is a concept that is relevant for other purposes such as matrimonial law and inheritance rules.
- It is not the case that (as widely reported) an individual qualifies as non-domiciled in the UK merely because his father was born abroad. If an individual domiciled overseas moves to the UK on a permanent basis he will acquire UK domicile, and the non-dom rules will no longer have any application to him. They are only relevant to those who become resident in the UK but retain significant ties overseas. If such individuals elect to apply the remittance basis it will only be of benefit to them if their overseas income and gains remain outside the UK; they cannot usually bring those funds to the UK without incurring a tax charge. Accumulating funds overseas without a UK tax charge is in general only of any benefit to individuals who are active overseas or who expect that at some future time they will once more be non-UK resident and will be in a position to enjoy those funds.
- Non-doms are not engaging in artificial tax avoidance. They are applying rules that Parliament has put in place, and has retained under governments of all political persuasions, precisely to cover the special situation of internationally mobile individuals. It has been suggested that non-doms can artificially avoid tax through the use of offshore trusts. However, there is comprehensive anti-avoidance legislation in this area.
- The non-dom rules are often defended on the basis that they attract wealthy individuals to the UK, and that those individuals contribute to the economic life of the nation. Commentators today have been saying that this is not the case because the system by its very nature deters such individuals from bringing funds to the UK. This, again, is based on a misunderstanding because there is a specific relief for individuals who bring funds to the UK to invest in a business (with rules to prevent such funds being extracted from the business for private purposes). There can be no doubt that if non-doms leave the UK in response to changes in the tax regime this will decrease investment in the UK; what the politicians must decide is whether this is a price worth paying for what they see as a matter of principle.
Clearly, abolishing the non-dom rules can only have two possible effects on individuals who are affected. Some of them will in future pay tax on their overseas income and capital gains. Others will choose to leave the UK (i.e. to cease to be resident here) or will never become resident in the first place, so that they will in any case pay tax only on income (if any) that arises in the UK and on capital gains relating to residential property in the UK. The crucial question is which reaction will predominate. This must be a matter of speculation. However, recent changes to the rules for establishing whether an individual is resident in the UK have made it much easier for individuals to be certain of their residence status, and thus to spend part of the year in the UK (up to the relevant limits) without becoming resident. It is by no means certain, therefore, that the proposed changes will have any significant benefit to the Exchequer.
Clearly this debate is now firmly on the election agenda, though it may generate more heat than light. Moore Stephens will be following the debate closely and will comment on any significant developments.
Private Client Tax team