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“Is this the end of the road for non-doms?

“Is this the end of the road for non-doms?

Non-domiciled tax status, a political hot potato if ever there was one, has been around in one form or another since 1799. Since then, the regime has undergone a plethora of changes, most recently in 2017 when a “deemed domicile” concept was introduced for income tax and capital gains tax, which very broadly limited the availability of the non-dom regime to 15 years of UK residency. The UK government was seen to come down hard on non-doms, noting that “it is only right that those who choose to live here for a long time pay a fair share of tax.”   The fact that long term residents who were non-domiciled could benefit from the new rules that created “protected trusts” and potentially pay less tax as a result was perhaps unsurprisingly not at the top of the Treasury’s press releases at the time.

Roll forward six years, two recent by-election wins for the Opposition (with massive swings in their favour in both) and a forthcoming general election, and the very pertinent question arises as to what the Labour Party will do to non-dom status if they get into power? In short, the answer seems to be that they will abolish it. And if so, that is of course potentially bad news for the – per HMRC official 2021/22 statistics – 78,700 non-doms or (perhaps even) deemed doms living in the UK, who contributed £12.4 billion in Income Tax, Capital Gains Tax and National Insurance Contributions that year.

So why are Labour proposing to abolish non-dom status, or “ending outdated tax perks” as they put it? Well, firstly its probably a political win in the eyes of many voters. Labour of course took full advantage when it came to light in 2022 that Akshata Murty, the wife of the then Chancellor Rishi Sunak no less, was claiming non-dom status and (according to reports) saving UK tax of £2.1m per year in the process.  “Staggering that she may have been benefitting from tax reduction schemes” they said (perhaps a little unfairly). Secondly, a 2022 paper by the London School of Economics suggests that abolishing non-dom status could raise £3.2 billion in tax, albeit that is a figure the Chancellor Jeremy Hunt has questioned. Thirdly in response to the age-old argument that “everyone will just leave,” Labour could point to another finding in that same paper that the 2017 reforms resulted in just 0.2% of non-doms leaving the UK.

And whilst Labour have said they will abolish non-dom status, what exactly does that mean? Complete removal of the status, a new regime that represents a slight tweaking around the edges, or something in between? Right now, it is fair to say no-one truly knows, but one suggestion is a replacement system for inbound non-doms who are “temporarily” in the UK, who could benefit from reduced tax rates on non-UK income for a period of say 5 years, but no more than that.  Other options potentially include significantly increasing the rate at which longer term UK resident non-doms protect their status by paying the Remittance Basis Charge, reducing the number of years before a taxpayer becomes deemed UK domiciled, or making the protected trust rules less generous – although none of these are arguably in keeping with Labour’s promise to “abolish” non-dom status.   

Whatever Labour choose to do should they win power, any changes to the non-dom regime are expected to involve a consultation period prior to any implementation. Previous changes to the non-dom regime have also involved grandfathering provisions to somewhat reduce the detrimental impact of any changes. So, whatever the result of any Labour changes, there may be a window of opportunity for advisors to plan ahead of their impact, assuming a “brain drain” exodus from the UK does not materialise. Whilst the option to put planning in place ahead of any changes seems attractive, readers of a certain vintage will remember (likely with some disdain) the lead up to the 2008 changes to the non-dom regime, when the draft legislation/goalposts changed regularly, making it almost impossible to advise. A repeat of that would not be popular amongst the tax profession.

At this early stage, the best advice may be a “wait and see” approach, while ensuring the issue is raised proactively with clients to inform them of the potential for significant changes. Trying to second guess either the outcome of a general election or any policy changes that may result from that is notoriously difficult and fraught with danger. As we move into 2024 however, a close eye will need to be kept on both opinion polls and, one would assume, firmer non-dom policy narrative from Labour should they get into power.

An interesting 12 months or so lies ahead……