With the next General Election looming, discussion in the Private Client world has inevitably turned to what the Conservative and Labour Parties might do to reform the UK’s current tax system in the event of a win. Current polling figures, and many commentators, predict a resounding Labour victory. So what do we know, at present, about what they plan to do? Neither party has published a manifesto as yet and so we do not have formal policies, or details setting out how they would achieve their intentions. However, a particularly hot topic for political parties at the moment is the taxation of non-domiciled individuals who are resident in the UK (‘res non-doms’).
What is domicile?
Domicile is a general law concept that refers to the country or legal system where an individual would consider they have their roots, or that they consider to be their permanent home. The concept of domicile has existed in UK law since the time of George III over 200 years ago.
Domicile is not the same as residence, nationality or citizenship, and an individual can only have one domicile at a time. Individuals can be resident in the UK for long periods under current rules, but retain an overseas domicile, on the basis that they do not intend to remain permanently or indefinitely in the UK and will ultimately return to their ‘home’ jurisdiction. Domicile is acquired at birth and is very adhesive. An individual can acquire a new domicile during their lifetime, but the birth domicile (‘domicile of origin’) is difficult to displace. The individual would have to show that they have permanently severed links with the country of their domicile of origin, and establish a permanent and irrevocable intention to remain in their new home country.
Non-doms who come to the UK would need to retain strong links to their country of origin, and to be clear that they do not intend to remain in the UK indefinitely. Although domicile of origin is very adhesive as outlined above, longer term residents run the risk of being treated as having acquired an UK domicile of choice in the absence of strong links to their home country and plans to return there.
What is the current regime that applies to ‘res non-doms’
Res non-doms are able to opt to access a favourable basis of taxation that is not available to UK resident and domiciled individuals. This favourable basis of taxation is known as the ‘Remittance Basis’. In common with UK resident and domiciled individuals, res non-doms who opt to use the Remittance Basis are subject to UK tax on their UK income and gains in the year they arise. However, res non-doms who use the Remittance Basis will only be taxed in the UK on overseas income or gains if the overseas income or gains are remitted here. As a result of this, res non-doms enjoy a potential tax advantage over resident and domiciled individuals in relation to their offshore wealth, and this has become an increasing bone of contention in recent years.
Under the current regime, res non-doms are not required to pay any charge to access the Remittance Basis in the first 7 years of their UK residence. They simply pay UK tax in overseas income and gains that are remitted to the UK. Once a res non-dom has been resident for more than 7 out of the previous 9 tax years, they need to pay a Remittance Basis Charge (‘RBC’) of £30,000 per tax year simply to access the Remittance Basis. Tax is paid on chargeable remittances of overseas income and gains on top of the payment of the RBC. Once res non-doms have been in the UK for more than 12 out of the previous 14 tax years, the RBC increases to £60,000 per tax year. Once they have been resident for more than 15 out of 20 tax years, res non-doms are no longer able to access to Remittance Basis and become ‘deemed domiciled’ for UK tax purposes. At that point, they are taxed on their UK and overseas income and gains as they arise.
If a res non-dom is found to have acquired a domicile of choice in the UK, they will be taxed on their worldwide income and gains as they arise without the option to access the Remittance Basis.
What are the main political parties proposing for non-doms?
The Conservative Party made a number of changes to the tax regime applicable to res non-doms in 2015 and 2017, to remove permanent access to the Remittance Basis and tighten rules in relation to the taxation of non-doms and offshore structures. We are not aware of any proposed changes to the non-dom rules from the Conservatives.
However, the Labour Party have confirmed that they want to scrap the current system. Instead, they are proposing ‘a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent’. We do not know at present whether this will mean changes to the concept of domicile or whether there will simply be limitations on the period during which res non-doms can benefit from an advantageous tax environment that would be introduced to replace the Remittance Basis. Rachel Reeves has mentioned a possible duration of 5 years for any new favourable regime but that consultation would take place with the business community on this point. In any event, the current UK legislation surrounding non doms is complex and may take time to unwind. It is possible that there could be some delay before a wholesale change to the non-dom regime could be implemented, if that is indeed the eventual policy.
The Labour Party is currently positioning itself as a friend to the business community and is making concerted efforts to woo the City. If Labour do want to encourage entrepreneurs to come to the UK from overseas to build businesses, generate profits and offer employment opportunities in the UK, then a 5 year window for a favourable tax regime would seem a little short for business to grow to those levels. A 10-year timeframe is being suggested as an alternative, which would allow the business the time they need to grow from the point of startup to generating profits. A 10-year timeframe would also sit in harmony with timeframes for tax-favoured regimes regimes offered by other countries such as Italy and Spain. Although an extension of a currently-proposed 5 year tax favoured regime to 10 years might not meet with the approval of all sections of the Labour Party as well as some element of British society more widely, it still represents a reduction from the current 15-year window for the favourable non-dom regime.
It has been pointed out that, when Labour have considered the abolition of non-dom status in the past, the proposals were quietly shelved. It seems very unlikely that this will be the case this time round, as the political and social climates have changed in the intervening period. It would be difficult for Labour to row back completely from this widely-publicised proposal which plays favourably with significant sections of the electorate.
What should res non-doms do?
The General Election has to take place by the end of January 2025. Elections are usually held in May or June and so it is anticipated that it will take place next Summer.
It is of course difficult to plan in an uncertain environment when the outcome of the election remains to be seen and detailed proposals are not yet available. However, it would be sensible for non-doms who have presently been in the UK for less than 15 years to review their current arrangements without delay, in particular their offshore wealth structuring, so that they are ready to take action when appropriate for them to do so. If you would like to arrange a review or discuss your situation, please contact Fiona Clark at Goodman Jones in the first instance to see how we may be able to help.
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
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