Are non-doms’ days numbered?
1 March 2024
The Tories have this week added their voice to the chorus of those indicating a move away from “non-dom” status. A “non-dom” or “non-UK domiciled individual” is someone whose permanent home is outside the UK, typically someone born abroad to parents who were not British, although this is not always the case. The main complaint raised about “non-doms” who live in the UK is that they do not have to pay UK income tax (IT) or capital gains tax (CGT) on the income and capital gains that they make outside the UK – at least until they bring (or “remit”) those income and gains to the UK – this is called the “remittance basis” of taxation.
My suspicion is that this and other announcements in the past week or so (and in the coming few days) about possible tax changes are just to gauge the public’s response to different ideas, before Jeremy Hunt decides what he is going to announce in the Budget on Wednesday – he probably has a number of different combinations of changes up his sleeve at the moment. The whole “non-dom” area is clearly one that many of the general public dislike (even though most people do not understand how the remittance basis works or how it encourages investment, and therefore more money, into the UK) and so, if the Tories make noises about “scrapping” it, they might hope to win more votes. They will no doubt be waiting to see how the announcement goes down in the press and in the polls, before a final decision is made about whether to make any changes to these rules.
That said, do I think the Tories will “scrap” non-dom status, so that no-one can pay tax on the remittance basis? No. This would be a huge deterrent to foreigners from coming to the UK.
Imagine you are a very wealthy foreigner and have £2m of non-UK dividends year on year from a tax-free/tax-neutral jurisdiction and you come to the UK for five years, where you will earn £1m per year. You would end up paying about £800k in tax on your non-UK dividends plus about £450k on your earned income in the UK: you would pay more in tax than your gross earned income. You would be better off putting your feet up on a beach somewhere warm (and outside the UK).
What they (or indeed Labour) might do is to detach eligibility for the remittance basis from “domicile” and attach it simply to years of UK residence. That could be what they will say that they mean by “scrapping non-dom status”. For example, they might say that, following a certain period of non-UK residence (eg six consecutive years), an individual may claim the remittance basis for up to x years (say 7 years) and then either that individual loses the ability to claim it, or will continue to be able to claim the remittance basis with (as is currently the case) a £30k or £60k annual charge up to the 15th year of UK residence.
Since my initial draft of this note there have been further rumours that we might move away altogether from the “remittance basis” for something simpler, but still beneficial for wealthy individuals who come to the UK and do not intend to remain here permanently. This would certainly be a huge relief to those who have to grapple with the complexities of the remittance basis rules in their daily lives. One possibility is that we would move to something more akin to what they have in Italy: broadly speaking, for an annual fee of €100k, most income and capital gains arising outside Italy is tax-free, although this only applies for the first 15 years of an individual’s residence in Italy after a gap of at least 9 years of non-Italian residence. Interestingly, to qualify under the Italian rules, one has to consider only years of “tax residence” in Italy and not some additional concept similar to “domicile”.
Changing to an Italian-style system would make HMRC’s job easier, as they will not have to spend so much time investigating those who claim the remittance basis (to check whether they have brought any of their foreign income or gains into the UK – something that triggers a tax charge under the present rules). Indeed, the simplicity might even encourage more investment into the UK, given the numbers being drawn to Italy in recent year because of their simpler system.
The announcements in the last 48 hours have focused on “domicile and the remittance basis” and not so much on “domicile and inheritance tax” (IHT), which is another matter altogether. In relation to the latter, again they might seek to link exposure to IHT just to years of UK residence and ignore domicile. It is somewhat odd to have two different concepts (“residence” and “domicile”) affecting individuals’ taxation – most other countries have just one.
“Domicile” can also be a very vague concept (unlike some aspects of “deemed domicile”), which makes determining some people’s UK tax liability quite uncertain. Trusts are an additional complexity, given that we have the concept of “excluded property trusts” (which are outside the scope of special IHT rules) which is connected to the settlor’s domicile; also some anti-avoidance legislation re income tax and CGT currently revolves around the settlor’s domicile status, but again there is no reason why this could not be changed so that the rules are applied by reference to a settlor’s residence history instead.
Also, I doubt that IHT will be scrapped altogether. Rather, what I think the Government could do is consolidate the nil-rate band and residence nil-rate band into a single, simple, larger “ordinary” nil-rate band of perhaps £1m per person. That will be relatively easy to do in the legislation. It will also reduce the number of people paying IHT, limiting it to the slightly wealthier families (for a married couple, the combined allowances would become £2m, instead of £1m). Reducing the rate of IHT without increasing the threshold may reduce the amount of IHT received by the Treasury by a similar amount, but will not reduce the number of people affected by IHT (and so will not appease those who are at the lower end of the spectrum who have to sell the family home to pay IHT because there are not sufficient other assets in the estate to cover it).
One caveat to all of this is that, whatever Jeremy Hunt announces in the Budget and tries to introduce through the Finance Bill in the summer, if Labour get in at the election, they may simply reverse it.
It has been suggested that any major changes could be introduced with effect from 6 April 2025, as 6 April 2024 would be unfairly soon. In reality, a change with effect from April 2025 means that the Tories do not have to do anything or worry too much about the consequences, as it will then be for Labour (assuming they win at an election later this year) to decide whether to keep the changes (in which case it will be Labour who will need to consider the minutiae of the changes, guidance and implementation) or to scrap it either for the current rules again for the time being or for something else altogether.