What lies ahead for UK non-doms under a Labour government? Our discussion with Jamie Favell, Partner, and Head of Private Clients at Tax Advisory Partnership (TAP), a market-leading accounting, tax, and advisory practice, sheds light on the uncertain future of non-dom tax privileges in the UK and offers practical guidance for those potentially affected.
Download PDF VersionWhat lies ahead for UK non-domiciled residents' (non-doms) tax benefits under a Labour government? Our discussion with Jamie Favell, Partner, and Head of Private Clients at Tax Advisory Partnership (TAP), a market-leading accounting, tax, and advisory practice, sheds light on the uncertain future of non-dom tax privileges in the UK and offers practical guidance for those potentially affected.
UK non-doms can access the 'remittance' basis of taxation. In the right circumstances, and with the right planning, these rules allow a non-dom to shelter their overseas investment income and capital gains from UK tax, and also to shelter non-UK assets from the scope of UK Inheritance Tax. This means that a wealthy non-domiciled taxpayer can live in the UK and pay little or no tax. It’s this headline of 'little or no tax' which keeps the topic in the press and makes it a favoured way for the current opposition to lobby the government.
These rules have been part of the British tax system for over 200 years now and are probably the most valuable form of personal tax relief the UK has. They were designed to entice wealthy individuals to come and live in the UK, when they could easily choose to live elsewhere. I have seen some commentary that suggests non-doms contribute around £8 billion annually to the economy, so it makes perfect sense to want to keep them here. The headlines don’t get into the detail of what contributions non-doms make to the economy, so a large majority of voters just see these tax reliefs as special treatment, which they are of course, but for good reason given the wider wealth-generating and economic activity their presence in the UK supplies.
The 2017 reform introduced the 'remittance' basis scheme as we know it today, and the basis for a maximum of 15 years before a taxpayer becomes deemed domiciled in the UK. Once deemed domiciled they are taxable on their worldwide income, and no longer able to make a claim to be taxed on the remittance basis. When these rules were introduced, we did see a number of non-doms leave the UK, or look to restructure their non-UK assets, using various structures before becoming deemed domiciled. Since then, many have returned for lifestyle and other reasons, as tax isn’t always the sole driver in decision making.
This will depend on which political party wins the next general election. The Conservatives are unlikely to make material changes to the regime already in place, unless it is felt they are needed to secure votes. The Labour Party are way ahead in the polls though and their stated policy is to ‘abolish’ non-dom status, which sounds ominous, but that could just be hard talking to incentivise their core voters. They have also not defined what 'abolish' would mean. Recent news articles also suggest that Labour are keeping their proposal to subject private school fees to VAT, which does seem to indicate the party is determined to stick to their wider reforming agenda. This represents a change to their initial position, which was to also strip private schools of the charitable status many enjoy, possibly indicating a ‘softening’ to their stance in other areas too, but only time will tell.
The maximum term for Parliament is five years. As the current Parliament first met on December 17, 2019, it will be automatically dissolved on December 17, 2024. Polling day would therefore take place 25 days later, placing the next general election in January 2025. However, King Charles could dissolve Parliament at any time before this date at the request of the prime minister.
Many Chancellors have considered changes to the non-dom rules in the past and have decided that they should keep the 'remittance' basis in some shape or form. Ultimately, this might be where Labour ends up, especially if they kick the issue down the road with a drawn-out consultation period.
Bearing in mind that a potential £8 billion financial hole appears if non-doms are forced to leave the UK, rather than abolish the reliefs entirely, perhaps they might just reform the existing rules.
Speculating on Labour’s likely changes is hard, but they could expand upon the changes introduced in 2017, such as reducing the number of years that a non-dom is eligible to claim the remittance basis, or increasing the remittance basis charge which must be paid to access the remittance basis from their 8th year of UK residence onwards.
Speculating further, perhaps existing non-doms, who relocated to the UK on the basis of being able to enjoy the remittance basis for 15 years, might benefit from some form of Grandfathering of the current rules, with only newly arriving non-doms being excluded from accessing the remittance basis.
The options are quite extensive with classic tax havens now competing with countries that have introduced special tax regimes to attract the wealthy. Probably the most popular destination for our clients, when thinking about a classic tax haven, is the UAE. This is particularly attractive as there is a double tax treaty in place between the UAE and the UK, which helps mitigate ongoing UK tax exposure. For others who want to be closer to Europe, then the Channel Islands, Monaco, and Gibraltar have also been popular.
However, many European countries which aren’t considered tax havens have now introduced special tax regimes and visas, designed to compete with the UK. The most popular destination being Portugal, but they are reforming their non-habitual resident (NHR) scheme introduced in 2009. Even France, Italy, and Spain now have special laws designed to attract wealthy and/or talented/skilled people to move there. We have even seen clients moving to the US and settling in States which have low taxes, like Florida for example. These are countries which you wouldn’t have normally advised clients to move to reduce their tax exposure!
Non-doms who are particularly concerned, and who may not be able to just leave the UK if the rules do change, may wish to consider some of the tax planning measures widely implemented in the run up to the 2017 reforms, hedging their bets early that Labour’s threat to abolish non-dom status is genuine.
This could involve excluding their non-UK assets from the scope of UK tax, to varying degrees, prior to becoming deemed UK domiciled, using an offshore trust, a company incorporated outside the UK, or even an offshore investment bond. These structures all have their own pros and cons, so as always, comprehensive UK tax advice would be necessary before implementing any planning.
It also needs to be considered that these previous ‘go to’ planning steps for non-doms may themselves be abolished or reformed, creating further uncertainty in advance of knowing for sure what changes, if any, Labour may implement.
As can be gathered from our discussion, the future is murky when it comes to UK non-dom tax benefits, primarily because this is tied to an election outcome which can go any of a few ways. If you find yourself in a position of uncertainty regarding your tax planning as a non-dom in the UK, we encourage you to get in touch, we would be happy to help
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