The UK’s tax regime available to non-domiciliaries (or “non-doms”) has been the subject of much scrutiny over the years, but it is now in ever sharper focus following the Labour conference at the end of 2023 where Rachel Reeves confirmed that non-doms tax status would be one of the party’s targeted tax changes.
As the country faces a cost-of-living crisis and the sentiment that everyone in the UK must pay their ‘fair share’ of tax grows, a tax regime that allows certain individuals to live in the UK for many years before they pay tax on the same basis as other UK taxpayers seems to be increasingly unpopular.
The main argument in favour of the regime is that affluent non-doms bring wealth to the UK that they would not if the UK tax regime were more hostile towards them – these individuals are internationally mobile and a less hospitable tax regime would cause them to leave the UK altogether. However, this argument took a blow in research from the University of Warwick’s CAGE Research Centre which suggested that:
- abolishing the non-dom regime would raise at least £3.2 billion just in capital gains tax and income tax, let alone inheritance tax (“IHT”);
- non-doms have at least £10.9 billion in offshore income and gains which are neither reported to HMRC nor taxed in the UK; and
- previous reforms that restricted access to the non-dom regime led to little emigration from the UK, and those who did leave were paying little UK tax so the tax loss resulting from their departure was limited.
Whether this data would hold true or not remains to be seen, but the £3.2 billion figure has certainly been latched onto in the political sphere. With the Prime Minister’s ‘working assumption’ being that a general election will be called towards the second half of 2024, and the incumbent Conservative party having suffered a loss of over a thousand seats in UK local elections in 2023, the Labour party leader claimed that the UK is “on course for a Labour majority at the next general election”, and most opinion polls would seem to support this. As a result, Labour’s proposals that the party would abolish non-dom status and introduce a shorter-term scheme for temporary UK residents, have come even more sharply into focus.
What might happen?
Whether or not Labour comes into power after the next general election, the current Conversative government has already made changes to the non-dom regime over recent years, and it appears that some change to the non-dom tax regime is inevitable. So, what might happen?
Previously, once a person had been tax resident in the UK for 17 out of 20 tax years, they would have been “deemed domiciled” in the UK for IHT purposes. However, the effect of significant reforms from 6 April 2017 was that these provisions were replaced with rules that apply for income tax and capital gains tax purpose as well as IHT, and the requisite residence period was reduced to 15 out of 20 tax years.
The “remittance basis” of taxation allows individuals who are neither domiciled nor deemed domiciled to limit the scope of UK capital gains tax and income tax to their 1. income and gains arising within the UK and 2. foreign income and gains brought to the UK. Their foreign income and gains would be outside the scope of UK taxation.
Non-doms can enjoy the remittance basis for no cost for up to the first 7 out of 9 tax years of UK residence. They must then pay a charge of £30,000 per annum if they have been UK resident for at least 7 of the previous 9 tax years, or £60,000 per annum if they have been resident for at least 12 of the previous 14 tax years. After this time, the individual would become deemed domiciled and subject to UK taxation on their worldwide income and gains.
It could be that:
- the initial ‘free’ period could be shortened from 7 years, if not abolished entirely;
- different periods of residence are introduced with different tiers of charge for use of the remittance basis; and/or
- the charges for use of the remittance basis are increased.
All of these changes would likely lead to non-doms contributing either more to the Treasury, and/or doing so sooner.
At present, broadly speaking, trusts established by individuals who are neither domiciled nor deemed to be domiciled within the UK, and which do not contain UK-situated assets, are outside the scope of IHT. This is the case even if the individual who created the trust (the “settlor”) becomes domiciled within the UK later on, and could benefit from the trust.
The rules surrounding these “excluded property trusts” were already amended in 2020, broadening the scope of IHT where certain additions, loans and appointments were made after the settlor became domiciled or deemed domiciled.
Grandfathering and anti-forestalling
There is no telling whether or how any changes to the non-dom regime may be implemented. However, the current system is well-established and developed, and completely reforming it might be considered unfair and undermine confidence in the UK.
Accordingly, it is the usual course of action for policies to apply with the benefit of “grandfathering” (also known as a being “legacied”), where an old rule continues to apply to existing situations, and new rules apply to future ones. In effect, a cut-off date is imposed, with different rules applying before and after it.
That said, past legislation has also been introduced with “anti-forestalling” provisions – in this context, measures which aim to nullify the benefit of undertaking certain tax planning ahead of the relevant tax rules being changed. As such, there can be no certainty of what might happen.
No-one can know what the future holds, but it certainly looks like change is on the horizon.
Non-doms would be prudent to consider their tax planning sooner rather than later to benefit from any grandfathering that may be available and, indeed, to avoid possible anti-forestalling measures that may render their planning efforts futile.
Nuanced, well-considered and bespoke advice that properly caters to an individual’s circumstances, private and business wealth, and succession objectives, also takes time. To ensure they receive the very best advice, non-doms should approach their advisers when they have the luxury of time, and long before any deadline is on the horizon.
The upshot is that, whilst it is not time for non-doms to panic, it is certainly time to take action.
At Edwin Coe, we are well-placed to advise on domicile, residence, tax and estate planning in accordance with each client’s unique circumstances. Please contact any of the members of the Private Client and Tax teams listed here should you require assistance.
 Very broadly speaking, individuals who are not settled in the UK, and who do not intend to remain permanently or indefinitely in the UK.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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