Non-dom tax status – a limited shelf life?
Non-dom status and the tax position of individuals with that status was once the preserve of private client lawyers and accountants, but in the last couple of decades non-dom status has increasingly come under the political spotlight with all the media attention that follows.
As readers will know, the UK tax regime is based on the location of assets, residence, and domicile. Domicile is a common law concept, essentially the place to which the individual has the most permanent connection. Tax legislation adds the concept of deemed domicile. This was originally introduced for inheritance tax purposes, but in the deemed domicile reforms of 2017, it was extended to income tax and capital gains tax, ending the possibility of being permanently non-domiciled for those tax purposes. Prior to an individual becoming deemed domiciled, they may opt for the remittance basis of taxation so that they are only taxed on foreign income and gains remitted or brought into the UK in addition to being taxed on UK income and gains. Currently, the remittance basis charge is £30,000 annually for those resident for seven out of the nine preceding years of tax assessment and £60,000 annually for those resident for 12 out of the 14 preceding years of tax assessment. The foreign income and gains may be taxed elsewhere depending on the tax rules of other relevant jurisdictions, and double tax treaty relief and unilateral relief may need to be considered.
HMRC releases official statistics on this group annually, and the latest statistical commentary was released on 6 July 2023. It presents a measured analysis of the position. It is interesting to note that:
- It is estimated that in 2022, there were 78,000 non-domiciled and deemed domiciled taxpayers (2021 estimate: 78,100);
- The actual numbers will be larger as deemed domiciled taxpayers do not have to show their tax status on their self-assessment return unless they wish to assert that they are maintaining their common law non-domiciled status, which may be important for them to do. But interestingly, the numbers of those deemed domiciled taxpayers (9,900 in 2022) are slightly falling following increases in the three years after the deemed domicile reforms in 2017, perhaps reflecting departures from the UK and the deaths of taxpayers. The numbers of non-domiciled taxpayers, while increasing from 2021 to 2022, have still not returned to pre-pandemic levels;
- It is estimated that in 2022 the total for Income Tax, Capital Gains tax, and National Insurance contributions was £12.4 billion (2021 estimate: £11.3 billion), broadly split between non-domiciled taxpayers and deemed domicile taxpayers on a 2:1 basis. The figures will always be shifting as non-domiciled taxpayers either move into being deemed domiciled or leave;
- Interestingly, of the non-domiciled taxpayers who are eligible to use the remittance basis, only a minority are paying the remittance basis charge, so they have been resident in the UK for less than seven years of the previous nine years before the year of assessment. On the other hand, those who are paying the remittance basis charge are slightly increasing in number as more move over that time threshold;
- The numbers contain a small number of non-domiciled and non-resident taxpayers. This group has been affected by the changes in recent years to capital gains tax on the disposal of UK residential property, although this has not increased the tax take significantly; and
- The use of Business Investment Relief continues to be low.
The Labour Party made it clear last year that they would abolish the status altogether, although they acknowledged that a replacement tax regime would be needed for those temporarily here in the UK. The Chancellor declined to be drawn into the matter in either his 2022 Autumn Statement or 2023 Spring Statement, preferring to keep the UK as an attractive destination for non-doms, acknowledging that they have a variety of other countries to choose from where they have a different tax regime and that they add much to the economy in other ways. But equally, he instructed the Treasury to look at the impact of abolishing the non-dom status before the Autumn Statement, and there were calls by the Labour Party for this analysis to be made public, although these were resisted. Much is usually made of the fact that the most sweeping non-dom reforms have in fact been made by the Conservative Party.
Any analysis will look at what amount of increased tax would be collected as opposed to the tax that would be lost if taxpayers decided to leave. The working paper published by the CAGE Research Centre of Warwick University on Taxation and the Super Rich in September 2022 suggested that departures would be likely to be low (based on 2017 responses to the reforms then) and estimated that the increased tax might be in the £2.4 to £3.2 billion range (depending on the extent of departures and taking into account the loss of the remittance basis charge) for a wholesale end to the regime and an estimated £1.6 billion if the regime were modified by dropping the allowable period for payment of the remittance basis charge. Presumably, an alternative tax regime as suggested by the Labour Party would also mean a lower tax saving when their proposals are looked at in detail. An element of the tax increase might, of course, happen naturally as some non-domiciled taxpayers move into being deemed domiciled taxpayers, but that is more speculative. Equally, some of the hoped-for tax collection might not materialise because income and gains are primarily taxed in other jurisdictions. The different possibilities show how difficult it is to assess the likely outcome.
We can be certain, though, that the spotlight is unlikely to shift in the months ahead as non-dom status has become too much of a political and media talking point and that clients will be looking for advice on courses of action.