Tax has dominated much political debate during this General Election, and all political parties have indicated that they will change the tax regime applicable to the non-domiciled but UK resident individuals ("non-doms").
In this brief, Nimesh Shah and Caroline Le Jeune share their comments on the background to the non-dom debate and the changes that could be introduced following the General Election.
The concept of domicile has been a feature of the UK tax system for over 100 years. The basic principle is that an individual who is not domiciled in the UK has the option to be taxed on their overseas income and capital gains only to the extent that they bring those monies to the UK.
In 2008, following a significant period of review by the Government, widespread changes were introduced to the non-domicile tax regime, and a flat charge of £30,000 was introduced for those non-domiciled individuals who had lived in the UK for more than seven years. At that time, it was expected that there would be no substantive changes to the regime going forward, but there have been almost annual changes to the rules which has naturally led to uncertainty and a lack of consistency.
Caroline comments, "When the Coalition Government came to power, they immediately reviewed the taxation of non-domiciled individuals and several new measures were announced, including a new £50,000 remittance basis charge for non-domiciled individuals who had lived in the UK for more than 12 years. At that time, the Coalition Government made a commitment to 'no further substantive changes for the rest of this Parliament' to the taxation of non-UK domiciled individuals. It was therefore disappointing that unexpected changes were announced in the 2014 Autumn Statement to increase the £50,000 remittance basis charge to £60,000 and introduce a new £90,000 charge."
At the time of the 2014 Autumn Statement, a consultation was announced which proposed to 'lock-in' a non-domiciled individual into the remittance basis charge for a minimum of three years. That consultation opened with the following statement -
"We recognise the significant contribution that non-UK domiciled individuals make in the UK, creating jobs and inward investment. That is why we stand firmly behind the remittance basis of taxation, which is a unique way of taxing people. With the changes announced at Autumn Statement 2014, the UK will continue to offer a very competitive tax regime, allowing people who are not domiciled here to base themselves in the UK for a long time whilst maintaining a different tax status."
The great 'non-dom' election debate
So what are the main political parties proposing?
Labour said they would "abolish the non-dom rules, while introducing a temporary residence rule for those genuinely in the UK for a short period of time, such as university students."
The Conservatives say they will increase the annual tax charges paid by those with non-domiciled status, "ensuring that they make a fair contribution to reducing the deficit, and continue to tackle abuses of this status."
The Liberal Democrats also say they will increase the current charges to £50,000, £100,000 and £150,000. In addition, the Liberal Democrats say they will end the ability for a person to inherit the non-dom status.
Nimesh comments, "The announcement by the Labour party on 8April stating they would abolish the non-domicile regime, if elected, was unexpected and the other political parties had to react accordingly. At this stage, there is no detail behind any of the proposals and how they could be introduced. Irrespective of who comes into Government, there should be a detailed period of consultation for any changes, with specific input from the professional bodies. Abolishing the non-domicile regime or any fundamental change to the current rules should not happen overnight as it realistically involves a complete re-write of the UK's personal tax legislation."
What could any changes look like?
If the non-domicile regime is completely abolished, it could be replaced with a temporary residence regime for people coming to the UK for the first time. There could be a 'grace period', say five years, for a person coming to the UK to not be assessed on their overseas income and capital gains. This could be on a remittance basis, or simply, you are not assessed on overseas income and capital gains and you can freely bring the monies to the UK. After the 'grace period', you are assessed on your worldwide income and capital gains.
What would happen to historic unremitted overseas monies? To balance the impact of abolishing the non-domicile regime, the Government could suggest that overseas monies can now be freely brought into the UK without a tax charge, or apply a flat rate of tax on monies brought to the UK which is lower than the current rates of income tax and capital gains tax. Such a measure could serve to 'soften' the effect of abolishing the regime and also act as an incentive for non-domiciled individuals to bring monies to the UK.
If the non-domicile regime continues in its current form, the main political parties have suggested that a person born in the UK should not be able to inherit the status. This would be difficult to apply in practice as domicile is strictly a common law concept, but has a bearing on how the person is taxed. Therefore, such a change would specifically require a change in the tax legislation. For example, anyone with a British passport cannot elect into the non-domicile regime - however, this would be problematic for someone born in the UK but who moves to a different country during their minority only to come to live in the UK many years later. Alternatively, once someone has been resident in the UK for a certain period of time (for example 17 years), they are regarded as domiciled in the UK for all UK taxation purposes.
How could a new domicile regime impact on inheritance tax ("IHT")? Under the present rules, it is a person's domicile status which determines how they are taxed for IHT purposes. A person who is not domiciled in the UK is only assessed to IHT in respect of UK assets. Within the current IHT legislation, however, there is the concept of 'deemed domicile', whereby once a non-domiciled individual has been resident for at least 17 out of the last 20 tax years, their worldwide estate is subject to IHT. If the concept of domicile is removed for IHT purposes, this is likely to be a significant deterrent for anyone moving to the UK as they would be immediately subject to UK IHT on wealth they have accumulated when they had no connection to the UK. It would appear sensible for the current IHT rules to remain as they are. If there is a change, the period in which a person becomes 'deemed domiciled' may be shortened, for example to after 10 years of UK residency.
What would happen to offshore structures, such as trusts and companies? Any changes could simply render all offshore structures ineffective going forwards, but historical structures may be 'grandfathered'. Prior to the 2008 changes, it was originally proposed that offshore trusts established by non-domiciled individuals would no longer be effective; however, the final rules (as they are now) were altered so that distributions from these structures would be assessed on a remittance basis. If the non-domicile regime is abolished, it is likely that offshore structures going forwards will be largely redundant.
No matter which political party comes into Government, there are likely to be changes to the non-domicile tax regime. Following the 2008 changes, and subsequent changes, the non-domicile tax legislation has become increasingly complex for all concerned. Whilst abolishing the non-domicile regime is potentially damaging to the UK's attractiveness, the current debate offers the prospect to refresh and ultimately simplify the existing rules, which could present interesting opportunities for non-domiciled individuals. There must be a detailed period of consultation with practical and clear legislation following.