Last week the House of Commons debated whether the Treasury should publish its analysis on the effect of abolishing the non-domicile tax status on tax revenues. From this discussion, it’s clear that politicians are undecided as to whether the non-dom regime is good for the country or not.
As a reminder, non-doms can choose to be taxed in a different way to UK doms. UK doms pay income tax and capital gains tax on their worldwide income and capital gains. Non-doms also pay tax on UK source income and gains, but they can elect to only be taxed on foreign income and gains if these are ‘remitted’ to the UK.
Let’s be clear, this is not a loophole. The non-dom regime is written into UK law, and those who use it are simply following the rules that parliament created. But the non-dom regime is not open to everyone; it is only available to those who view another country as their permanent home. Those people can make a ‘remittance basis claim’ at no cost for their first seven years of UK residence, then at a charge of £30k per annum for the next four years, and £60k for another two years. Once non-doms have been UK resident for 15 years, they start to be taxed on the same worldwide basis as UK doms. We can be confident that those who use the remittance basis pay less UK tax than an equivalent UK dom would: after all, why else would you make the claim?
We can also say without a doubt that we do not know what the impact will be if non-dom status was scrapped. This is because the government does not collect data on the foreign income and gains of non-doms that it does not tax. Consequently, any number of eminent studies can come up with a methodology for measuring the tax impact, but the result will only ever be an estimate.
Labour’s stated aim is to abolish the non-dom regime and replace it with something else. At present, that ‘something else’ has not been defined.
How about a new regime for ‘non-permanent residents’? In order to make this a fairer system (one of Labour’s aims), this could be limited to those who have not been UK resident within the last, say, 10 years, and could also apply for a limited period. Too short a period is likely to be uncompetitive when compared with other jurisdictions, so 10 to 15 years could be appropriate. This new system would aim to attract people to relocate to the UK by giving them a tax break which is comparable to the tax breaks in many other jurisdictions such as Portugal or Switzerland, encouraging investment and expenditure in the UK economy.
Then we have to determine the tax break itself. How about taxing UK source income and gains, but not foreign sources retained abroad? That way we would not tax wealth that has no UK connection but would tax anything that’s used here.
Lastly, this new regime would need rules for dealing with the structures used by wealthy families around the world to hold and protect their assets. One fair approach would be to tax UK residents on the value of any benefit they receive, at the time they receive it.
Such a regime would break the link to non-doms, encouraging all long-term non-UK residents to settle here. It would be time limited, transparent, and apply equally to everyone regardless of where they were born. As it happens, it would also be remarkably similar to the system we have now, but with a focus on bringing wealth and talent to the UK, rather than on random factors such as your father’s place of birth and where you want to be buried.
Home >Articles > How can we make non-dom rules fit for purpose?
How can we make non-dom rules fit for purpose?
Last week the House of Commons debated whether the Treasury should publish its analysis on the effect of abolishing the non-domicile tax status on tax revenues. From this discussion, it’s clear that politicians are undecided as to whether the non-dom regime is good for the country or not.
As a reminder, non-doms can choose to be taxed in a different way to UK doms. UK doms pay income tax and capital gains tax on their worldwide income and capital gains. Non-doms also pay tax on UK source income and gains, but they can elect to only be taxed on foreign income and gains if these are ‘remitted’ to the UK.
Let’s be clear, this is not a loophole. The non-dom regime is written into UK law, and those who use it are simply following the rules that parliament created. But the non-dom regime is not open to everyone; it is only available to those who view another country as their permanent home. Those people can make a ‘remittance basis claim’ at no cost for their first seven years of UK residence, then at a charge of £30k per annum for the next four years, and £60k for another two years. Once non-doms have been UK resident for 15 years, they start to be taxed on the same worldwide basis as UK doms. We can be confident that those who use the remittance basis pay less UK tax than an equivalent UK dom would: after all, why else would you make the claim?
We can also say without a doubt that we do not know what the impact will be if non-dom status was scrapped. This is because the government does not collect data on the foreign income and gains of non-doms that it does not tax. Consequently, any number of eminent studies can come up with a methodology for measuring the tax impact, but the result will only ever be an estimate.
Labour’s stated aim is to abolish the non-dom regime and replace it with something else. At present, that ‘something else’ has not been defined.
How about a new regime for ‘non-permanent residents’? In order to make this a fairer system (one of Labour’s aims), this could be limited to those who have not been UK resident within the last, say, 10 years, and could also apply for a limited period. Too short a period is likely to be uncompetitive when compared with other jurisdictions, so 10 to 15 years could be appropriate. This new system would aim to attract people to relocate to the UK by giving them a tax break which is comparable to the tax breaks in many other jurisdictions such as Portugal or Switzerland, encouraging investment and expenditure in the UK economy.
Then we have to determine the tax break itself. How about taxing UK source income and gains, but not foreign sources retained abroad? That way we would not tax wealth that has no UK connection but would tax anything that’s used here.
Lastly, this new regime would need rules for dealing with the structures used by wealthy families around the world to hold and protect their assets. One fair approach would be to tax UK residents on the value of any benefit they receive, at the time they receive it.
Such a regime would break the link to non-doms, encouraging all long-term non-UK residents to settle here. It would be time limited, transparent, and apply equally to everyone regardless of where they were born. As it happens, it would also be remarkably similar to the system we have now, but with a focus on bringing wealth and talent to the UK, rather than on random factors such as your father’s place of birth and where you want to be buried.
.tmb-editorspic.jpg?sfvrsn=df04ab27_1)
