The taxation of “non-doms”: Back in the headlines

Throughout 2022, the remittance basis was back in the headlines.  In the first half of the year, it emerged that Akshata Murty, the wife of Rishi Sunak MP (the Chancellor at the time and now the Prime Minister), was taxed on the remittance basis (although she quickly announced that this would cease to be the case).  In the second half of the year, the substantial tax reforms announced by the government to deal with the current economic crisis did not include any specific changes to the tax regime for non-doms, despite social and political pressure for such reforms.

However, as we look towards a general election in 2024, it seems highly likely that change is coming.  Whilst the recent press and political coverage has focused on the remittance basis, we must assume that the special rules for trusts and inheritance tax are also in the firing line.

What is “domicile”?

Domicile is a common law concept, and different entirely from tax residence, habitual residence or citizenship:

• a domicile of origin is acquired at birth and is usually that of the individual’s father at the time of birth;
• an unmarried child under the age of 16 has a domicile of dependency which follows that of the person on whom he is legally dependent; and
• an individual acquires a domicile of choice by being physically present in a jurisdiction and having a fixed and settled intention to live there permanently or indefinitely.

In addition, for tax purposes only, we have the concept of “deemed domicile” (discussed below).

What is the “remittance basis”?

Most UK tax residents are taxed on the “arising basis”, which means they are fully liable to UK tax on their worldwide income and gains.

However, an individual who is non-UK domiciled (and not deemed domiciled) can choose to be taxed on the “remittance basis”, such that they are liable to UK tax on UK source income and gains in the normal way, but they are only liable to UK tax on foreign income and gains that are enjoyed in or brought (“remitted”) to the UK.

There is no charge to use the remittance basis until an individual has been UK resident for more than seven out of the previous nine tax years. Thereafter, the claim for remittance basis costs £30,000 each year and increases to £60,000 once an individual has been resident for more than 12 years.  After 15 years, the individual is “deemed domiciled” and the remittance basis is no longer available.

How widely used is the remittance basis?

According to HMRC’s published statistics, around 45,000 taxpayers claimed the remittance basis in the 2020/2021 tax year; the total income tax, CGT and national insurance contributions paid by remittance basis taxpayers in 2020/2021 was nearly £6.4 billion.

A study published by Warwick University and the London School of Economics in September 2022 estimates that the total unreported income and gains of non-doms claiming the remittance basis is at least £10.9 billion.

How have the rules changed over time?

The UK tax regime has included a form of remittance basis since its introduction by William Pitt the Younger in 1799.  However, it was not until 1914 that its availability was restricted to non-domiciliaries (and British subjects who were not ordinarily resident).  There were further changes in 1940, but the regime then remained stable until 2008 saw the introduction of the remittance basis charge, as well as further changes to the operation of the rules.

The most dramatic reforms came in 2017, implementing manifesto pledges from the 2015 general election. The availability of the remittance basis was limited by the introduction of new deemed domicile rules for those who had been UK tax resident for 15 years and those who were born in the UK with a UK domicile of origin.  However, the impact of these reforms was substantially tempered by the introduction of the regime for so-called “protected settlements”.  These rules allow foreign income and gains realised in non-UK resident trusts settled by a non-dom before becoming deemed domiciled under the 15 year rule to roll-up tax free (NB. these benefits are not available to non-doms in the second category, i.e. born in the UK with a UK domicile of origin.  Protected settlements also only remain protected for so long as the settlor remains non domiciled under common law).

Will there be further changes?

It seems highly likely that further changes are on the cards.

In April 2022, Rachel Reeves (Shadow Chancellor) announced that the Labour Party would “abolish” the remittance basis.  She later clarified that the regime would be replaced with a shorter-term scheme for those staying in the UK for up to five years.

Although the Conservative party has not made further statements on the future of the remittance basis, it seems inevitable that it will feel compelled to react to any Labour manifesto commitments to abolish or amend the regime.  As a result,  even a Conservative victory in the next election may not prevent changes.

Abolition is one option, as is replacement with a shorter term scheme.  Alternatively, the rules could remain in place, but with the remittance basis charge payable at an earlier time.  It is also possible that any new regime could be de-linked from the common law concept of domicile, perhaps with the introduction of a statutory domicile test.

Any reforms to the remittance basis will also need to address the continuing availability of the rules for protected trusts.

What is the possible impact of abolishing the remittance basis?

Proponents of the remittance basis argue that if the tax burden of non-doms was as great as that of a UK domiciliary, fewer would choose to live in the UK and the economy would suffer as a result (through loss of direct taxes, investment and expenditure). The UK is far from unique in offering a preferential tax regime for immigrants – other jurisdictions such as Ireland, Cyprus, Malta, France, Portugal, Spain, the Netherlands, Sweden, Switzerland and Italy all have their own regimes that are designed to attract wealthy mobile individuals.  This means there is a lot of fiscal competition out there from other countries wanting to attract energetic entrepreneurial families.

On the other side of the fence, many of those who argue for its abolition say it is a matter of injustice or inequality:  why should non-doms not be required to pay tax on their worldwide income when they are entitled to live in the UK year-round, just like other taxpayers.

It is also argued that abolishing the remittance basis would actually raise revenue.  The aforementioned report by Warwick/LSE estimated that abolishing the regime would raise at least £3.2 billion (reduced by £210 million if the benefits of the regime are retained for the first year of arrival, £860 million for the first three years and £1.6 billion for the first five years).  One of the primary factors used to determine this figure is the assumption that the number of remittance basis users would fall by just 0.3% (approximately 77 individuals), an estimate which is based on their analysis of the migration response to the 2017 reforms.

In this author’s opinion, the Warwick/LSE report underestimates the likely impact on migration.  One of the main reasons that so few families left the UK in response to the 2017 changes was the new regime for protected trusts – this enabled many non-doms to remain UK tax resident without being taxed on the foreign income and gains within such trust structures (both before and after the acquisition of deemed domiciled). If this protection were removed, it seems highly likely that many more would cease UK tax residence. Whilst there are of course myriad other reasons why individuals would choose to continue spending time in the UK (despite the weather!), they could do so without being UK tax resident.

What about inheritance tax?

The rules are again very favourable: A non-dom is taxable on UK situs assets, but non-UK situs assets are outside the scope of UK inheritance tax (as “excluded property”).  Trusts set up by a non-dom can remain outside the scope of IHT even after the settlor acquires a UK domicile or deemed domicile.

To date, there has been little political debate or press coverage regarding the IHT position of non-doms, but it should be anticipated that any reforms to the “non-dom rules” would extend to IHT.

Conclusion

The dust may have settled on Akshata Murty’s use of the remittance basis, but this controversial regime will continue to dominate headlines as we look towards the 2024 general election.  Any future government will face the challenge of ensuring the UK remains fiscally attractive to wealthy families, balanced against the general public’s perception of fairness.

Whilst the current rules are not perfect, they certainly serve a purpose – one that is recognized by many other jurisdictions competing with the UK to attract energetic entrepreneurial energetic entrepreneurial individuals to their shores.  We lose sight of that at our peril.

This article first appeared in the January issue of The Month from the Private Client Global Elite.