Non-Dom Tax Status under Scrutiny

8th April 2015

The Labour Party have announced today that they intend to overhaul the UK Resident Non-Domicile Regime if they win the next general election.

The announcement places the UK Res Non-Dom debate right at the heart of the General Election and “tax fairness”. It is unclear what the final proposals are and the speeches of the Labour Leader and the Shadow Chancellor have shed limited light on this. We suspect this is deliberate as they will need to work out the detail and also gauge reaction from the City as well as the public. That said, the brief proposals are the most radical that have ever been proposed and threaten London’s position as a financial centre. It will already mean clients potentially coming to the UK will need to consider deferring until after the General Election on 7th May and those already here plan for an exit with a potential 2 year window following the election of a Labour Government.

UK resident but non-UK domiciled individuals have, for many years, enjoyed a beneficial tax position in the UK. Under the current system, those that are resident (i.e. living) in the UK, but not UK domiciled, can elect to be taxed in the UK under the remittance basis of taxation. This enables such individuals to pay UK tax on their UK source income and gains and only on their foreign source income and gains that are “remitted” into the UK, but unlike those resident and domiciled in the UK, they can legitimately avoid paying UK tax on their foreign income and gains kept offshore.

The proposals put forward so far are:

•The Non-Dom UK tax rules will be abolished (and anyone permanently residing in the UK would be liable to pay UK tax on their worldwide income and gains, but this needs to be clarified);
•There will be a new rule for temporary residents (persons who are only resident in the UK for a short period, such as people seconded to the UK on business or to study), so that they would only be taxed on their UK source income and gains. This “temporary period” will be the subject of a consultation but is expected to be up to 4 or 5 years; and there would be a “transition period” of 2 years to allow UK Res Non-Doms to organise their affairs.

The scope of the proposals will need to be confirmed, however, once the election is over and any legislation published in draft. It may be that  Labour’s announcements will be tempered slightly and they will seek to make radical changes to the UK Res Non-Dom Regime similar to those brought about by the former Labour Government in 2008.

In the 2007 pre-Budget Report, the former Labour Government announced a number of significant tax changes to the UK Res Non-Dom Regime, many of which were enacted the following year in the Finance Act 2008.  The Finance Act 2008 saw the introduction of the remittance basis charge, changes to the remittance basis rules (and the meaning of “remittance”) and changes to the UK taxation of offshore trusts (where previously UK Res Non-Doms could roll up gains in offshore trust structures free of any charge to UK tax).

However, there were a number of other proposals which had been put forward which were either watered down or abandoned during the parliamentary process and it remains to be seen whether or not these measures will be raised by Labour again (if it does not completely overhaul the UK Res Non-Dom Regime) or picked up by other political parties.

For example, the original draft legislation of the Finance Act 2008 had contained notification rules whereby a UK resident but non-UK domiciled individual who had contributed funds to an offshore trust would have been required to notify the UK Revenue of the trust, even though this information may not have been directly relevant to a UK tax liability.

Another possible measure which could be introduced is a “deemed domicile” rule (similar to that for inheritance tax) where long term UK Res Non-Doms will lose the right to the remittance basis after a period of time. Under the current “deemed domicile” rules, which only applies to UK inheritance tax, UK Res Non-Doms who have lived in the UK for 17 out of the last 20 UK tax years are subject to UK inheritance tax on their worldwide estate (whereas UK Res Non-Doms who are UK resident for a shorter period of time are only subject to UK inheritance tax on their UK estate).