What exactly is proposed, and when would it take effect?
Ed Miliband has announced that a Labour government would abolish UK non-domiciled (non-dom) tax status.
As with so many pre-election manifesto commitments, the breadth of the rhetoric is not supported by the depth of detail. Some form of consultation has been promised, with a recognition that the remittance basis of taxation might continue to be available to individuals who are not domiciled in the UK but are resident here for only a relatively short period of time – say two, three or four consecutive tax years.
Domicile is also a relevant concept in relation to UK inheritance tax. It is by no means clear whether the Labour Party is committed to reviewing that area of UK tax law.
So what is domicile and why does it matter?
Many would read ‘domicile’ and presume it means the place they live, but for tax it has a specific common law meaning. The simplest way to describe it is as the place you think of as your true home, where you have your roots and to which you will return. It is not necessarily the place where you currently are, where you were born or where you are a citizen.
A non-dom individual may elect to be taxed on the remittance basis. They will then only be taxable on income and gains arising in the UK, plus any income they remit from abroad. If unremitted income and gains exceed £2,000 in a tax year, the individual is subject to the remittance basis charge of up to £90,000, depending on how long they have been UK resident.
How did the rules originally come about?
The modern concept of domicile only entered the tax system in 1914, when for the first time a charge was imposed on foreign income as it arose, regardless of whether or not it was remitted to the UK. However, that charge did not apply to non-domiciled individuals, who continued to be taxed only on income remitted to the UK.
While the perception is that non-dom status favours the rich, the roots of the introduction of the system were about ensuring fairness and equality. As the Liberal chancellor of the exchequer David Lloyd George pointed out at the time:
‘These poor men roll up their money in companies, in land and securities abroad, and they ought not to escape when the rich of this country have to pay. I am for equality in this respect. A great landowner pays in full on his land, and I have some sympathy for him when others are rolling up their money abroad and avoiding taxation. I want equality of treatment.’
This language harks back to an era when UK landowners were the wealthiest men (generally, they were men) in the world, who could not escape taxes in the UK. By contrast, the ‘poor men’ mentioned by Lloyd George were those who made their fortunes from foreign trade, the profits of which would not be taxed in the UK until such a time as they were remitted to the UK, if ever. The Finance Bill 1914 was to change all that, with only non-doms allowed to escape tax on overseas profits that had not been remitted to the UK.
How different the social and economic context is now! The days of Empire are long gone. The UK’s landed gentry are no longer the world’s wealthiest and fewer ‘poor men’ of the UK make their fortunes overseas. As the pendulum of tax fairness has swung so far away from its position in 1914, it’s sensible to reassess the place of domicile within a 21st century tax regime.
How many people would be affected, and what is the likely effect on revenue yield?
Around 116,000 people declare their domicile status because it is relevant to their tax affairs. There are probably several million people in the UK who might have a legitimate claim to be non-domiciled, but they have no reason to register their domicile status with HMRC because it makes no difference at all to their tax position.
So, how much would this measure raise? The Labour Party is talking about hundreds of millions of pounds but there doesn’t appear to be any evidence to back this up.
Those most likely to be impacted are the wealthy business executives and international jetsetters who reside largely in London and the home counties.
As regards wealthy business executives, the impact of the removal of non-dom status could well result in their companies picking up the bill under tax equalisation plans.
A relatively benign tax regime for long-term UK residents who are not domiciled here is not the only attraction of the UK. Desirable property, social freedoms, excellent schools and access to world-class healthcare are just some of the non-tax factors which individuals will weigh up in deciding whether to leave the UK, if the Labour party proposals are converted into legislation.
Final thoughts?
We anticipate that every individual who might be affected by the changes will consider their position carefully. While some will undoubtedly decide to sever their ties with the UK, many will address the possibility of maintaining reduced links in a way which enables them to be recategorised as non-resident. The statutory residence test will of course be an insuperable barrier for many, who will decide that their best interests are served by leaving the UK. Despite this, we do not expect to see the massive flight of wealth or talent which some are predicting.
