UK opposition party promises to abolish non-dom status

Thursday, 09 April 2015

Ed Miliband, leader of the opposition in the UK (the Labour party), has promised to abolish tax concessions for non-domiciled UK residents if he wins the general election on 7 May.

Non-doms have long been permitted to pay tax only on income and gains arising in the UK or remitted to the UK from abroad, if they so elect. More recently, the Finance Act 2008 introduced a GBP30,000 annual charge for long-term non-doms who made this 'remittance basis election'. The present government has raised this charge to GBP50,000, and to GBP90,000 for those staying in the UK long-term.

Of roughly 116,000 non-doms believed to be resident in the UK, about 49,000 have elected for the remittance basis, according to the Chartered Institute of Taxation. Only about 6,000 of these have been resident in the UK long enough to have to pay the remittance basis charge.

In a speech on Tuesday, Ed Miliband said this 'loophole' could no longer be justified, and that 'those who use public services owe obligations to help fund them according to their ability to do so'. He claimed that some people born with British citizenship had established non-dom tax status by 'saying that they plan to move abroad again in future, and by doing simple things like buying a burial plot overseas or even subscribing to foreign newspapers'.

The Labour party further asserted that the non-dom rules are also used to avoid tax on UK income and property. 'For example, non-doms can use offshore trusts to buy expensive UK homes and avoid inheritance tax.' However, Tom Elliott of Crowe Clark Whitehill, argues that this practice is no longer so common because of the annual tax on enveloped property introduced by the Conservative-led coalition government.

Miliband estimated the reform would bring in 'hundreds of millions of pounds' of extra tax revenues. However, the announcement was somewhat undermined when the Conservative party made reference to a recent BBC TV interview with Labour's Shadow Chancellor Ed Balls, in which Balls admitted that a complete abolition of non-dom status might actually be revenue-negative, depending on the reaction of non-doms themselves.

Ed Balls has since explained that some temporary UK residents, such as 'students or people living here for a short time on business' would still be allowed to protect their offshore income from UK tax. This 'short time' is expected to be two to five years, but further details of this exemption will have to be put to consultation after the election. There would also be a two-year transitional period to allow non-doms to re-organise their affairs.

Research seems to show that non-doms do pay significant sums in UK tax – last year law firm Pinsent Masons claimed that non-doms paid GBP6.8 billion of income tax in the 2011-12 tax year alone – 19 per cent more than 2008-09 when the remittance basis charge was introduced. Figures such as these are being used to suggest that a presumed exodus of wealthy clients following the abolition of non-dom status would damage tax revenues, as well as business investment. Indeed many experts have expressed concern at the impact this measure would have on the UK economy.

Geoff Cook TEP of Jersey Finance suggested that emigrating non-doms would probably go to Dubai, Hong Kong or Singapore, or possibly France, Portugal or Switzerland, all of which have different types of preferential tax schemes for new high-net-worth residents, as does Jersey.

Ashley Crossley TEP of Baker McKenzie described the proposals as 'the most radical that have ever been proposed and threaten London's position as a financial centre. Those already here [must] plan for an exit with a potential two-year window following the election of a Labour Government', he said.

'It's very unclear what additional revenue would be raised, but the UK's international reputation would be put at risk', said Simon Walker, Girector-General of the Institute of Directors.

Tax barrister Graham Aaronson – who drafted HM Treasury's general anti-abuse rule – described the proposal as 'economic folly' because wealthy individuals would spend less time in Britain and some would choose not to set up businesses there.

'If these changes are introduced, then it is certain that the very significant revenues generated by the non-dom levy will be lost', said Piers Master TEP of Charles Russell Speechlys. 'The gamble is that the people who currently pay the levy will choose to stay in the UK and pay more tax; there is no guarantee that they will do so.'

However, some advisors, including George Bull TEP of Baker Tilly, disagreed that an exodus was likely.

Geoffrey Todd TEP, a partner at private wealth management firm Boodle Hatfield, noted that domicile is a fundamental concept of the UK tax system, whose tax rates and reliefs have been set to reflect the fact that a distinction exists between residence and domicile. 'Consequently, abolishing the whole concept would be something of a leap in the dark with the economic effects unknown', he warned.

  • The Times reports that the Conservative party is considering plans to prevent individuals inheriting non-dom status from their parents.

Sources

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