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The non-dom rules: how to raise £2bn more tax, and make the UK more competitive

The non-dom rules: how to raise £2bn more tax, and make the UK more competitive

September 27, 2022

Thanks to a new paper, we can put numbers on the non-dom regime – the assets it covers, and the income/gains they generate, and taxpayer responses to losing non-dom status. So, armed with this data, how should we reform the non-dom regime?

I’ve written before about the UK non-dom regime. We realistically need some kind of simplified tax regime for new arrivals, but the non-dom regime is of little practical use to normal people arriving in the UK (even highly paid ones), but of huge value to the exceedingly wealthy.

There is a new paper from Arun Advani, David Burgherr and Andy Summers which lets us put some numbers on all this. They estimate abolishing the non-dom rules would raise at least £3.2bn of income tax and capital gains tax revenue. That would be reduced by £210m if we keep the rules for the first year after someone arrives in the UK, and £860m if we keep the rules for the first three years.

So, informed by this, how would I reform the non-dom rules?

I’d burn the whole thing to the ground:

End the “domicile” concept, which is complex and uncertain – and with all things complex and uncertain, that makes life harder for honest taxpayers and easier for tax avoiders and tax evaders. Replace it with a simple statutory test. For example: if you’ve never been resident in the UK before, then we have a new temporary non-resident scheme which applies for your first few years.
End the over-generous 15 year timespan. Three years is plenty. We want to give people time to land on their feet and adapt. We don’t need a semi-permanent class of UK residents with a raft of generous tax exemptions.
End the complexity of the remittance basis. Simply exempt temporary non-residents from all UK tax on their worldwide income and gains, subject to a lifetime cap of say £2m (to prevent the UK becoming a stepping stone in ultra-high net worth tax planning).
Inheritance tax should follow that. Exempt temporary non-residents from inheritance tax on their foreign assets. Everyone else fully subject to inheritance tax. And only fair we rationalise the treatment of those leaving the UK – perhaps taper down inheritance tax over seven years for those who cease to be resident.

So this potentially raises £2bn more in income tax and capital gains tax, plus probably at least £500m in inheritance tax.¹ It gives us a very generous treatment for new arrivals, giving them time to land on their feet. And it’s actually available and useful to all, not just the very advised.

However, we need to go further:

If all we do is end the non-dom rules, then the very wealthy, and very well-advised, will be surprisingly unaffected. Why? Because they’ll have put their offshore assets into offshore trusts. ² How do we achieve this? I’m open-minded. We could push people to close the trusts, e.g. by taxing them say 5% of a trust’s asset value each year. Or we could tax the trusts just as if the settlor still owned the trust property. Plenty of other options. The important thing is that there’s no point reforming the non-dom rules if we don’t also close down excluded property trusts.
There are thousands of non-doms who have offshore property/assets which they can’t bring into the UK without a remittance charge. We could keep the old remittance rules for these assets – but that would just pile complexity on top of complexity. Instead, I’d say to them: okay, we’re going to tax all of your offshore income and gains going forward. But all your historic assets, income and gains? You’re now free to bring it into the UK without remittance tax. That may strike many non-doms as a good deal.

Obviously this is a high level road map and not a detailed proposal. There is a lot of complexity here, particularly around trusts, which is why it’s important that reforms are the subject of detailed thought. By which I don’t mean consultation – there should be consultation on the precise mechanics, but the principles, once decided upon, should be set in stone. All the endless complexity shouldn’t distract us from the basic point: the non-dom rules are broken, unfair, and should go.

Passport image by Caspar Rae on Unsplash

Footnotes

We can do a back-of-the-napkin calculation to estimate the order of magnitude as follows: the paper estimates non-doms have £10.9bn in foreign income and gains, implying assets of well over £100bn. It should be reasonably straightforward to apply an actuarial model to age cohorts and estimate how much of the £100bn+ will be owned by people dying whilst resident in the UK in any given year, but for the moment let’s assume it’s 5%. Then apply the rate of IHT to that – not 40% but 10%, the actual effective rate for the very wealthy. So the napkin says: £100bn of assets x 5% x 10% = £500m. The assets will be much more than this (meaning a bigger number), dynamic effects very considerable (meaning a smaller one), but this should give us the right number of zeroes ↩︎
These are (very broadly) excluded from UK tax if the settlor (the person creating the trust) was a non-dom at the time it was created. ↩︎

6 responses to “The non-dom rules: how to raise £2bn more tax, and make the UK more competitive”

Laurence Parry

September 27, 2022 4:26 pm

There’s an awful lot to like about this – its similar to the abolition of ordinary residence back with the SRT for OWDR – have a defined period which qualifies.

This is predicated on the belief that we do need a simplified regime for new arrivals – many would take the view that we dont.

But working on the assumption that we do, some thoughts on the above proposals:

– three years is too short. The time to actually decide whether to stay in the UK is in practice longer. Finding schools, settling kids in, getting friend groups – all of which ‘normal’ people have to do in the same time scale – takes time. But IF we want to encourage this group of individuals to come to the UK, we need to make the timescale welcoming as well.

This is particularly the case given the other similar tax regimes in other countries eg Spain, Portugal and Italy all have longer periods. I would go for 7 out of the 10 preceding years to become fully UK taxable, but once you have this status, you have the temporary non-res rules to cover income and gains for the next 5 years.

– In terms of excluded property trusts, we do need to deal with these, but moving the goalposts in this way does risk the accusation of inconsistency in policy making. Once that reputation is lost, its difficult to regain.

We could give people the choice. Pay tax on the income and gains in the structure, as any UK dom would, or face a ‘super remittance basis charge’. You could offer this as £100k pa if you want to disclose all the income and gains in the structure, and £250kpa if you dont. This would raise quite a lot of money, without having to have arguments on motive tests for TOAA/s13 (most UHNW could justify motive tests if push comes to shove).

– There is a lot of commercial property that is owned by overseas entities which are currently outside the IHT regime. The impact of changes to EPTs would need to be considered here.

– I would keep the remittance basis rules as they are. But given that income and gains would now be taxable, unless in EPTs, then income and gains will be capable of being used in the UK.

– The proposal deals with the issue of returning non-doms which doesnt make much sense.

Reply
Philippe KIEFFER

September 27, 2022 11:51 am

If you are going to bring pre-existing assets onshore how to you deal with built in losses (more than likely today and in the foreseeable future) e.g bought stock at 200, worth 100 when brought onshore and 150 at year end?? Another question is the functional currency eg USD pre existing assets with MTN gains due fo GBP depreciation (more than likely today and in the foreseeable future)?? These are only 2 quick comments but i would happy to respond more fully if this is genuine exercise to improve the system and not just rhetoric:-).

Reply
1. Dan
  
  September 27, 2022 2:04 pm
  
  All of this needs thought, and I’m much more interested in careful policy than rhetoric. However my immediate view is that the answer is “the same as any other assets”, ie under current law the gain/loss is determined based on the historic acquisition price, not the point at which a person becomes UK tax resident. One could have transitional rules to encourage (or, conversely, deter) people to rebase assets prior to the new regime kicking in.
  
  Reply
  1. Philippe KIEFFER
    
    September 27, 2022 5:16 pm
    
    I agree that the system needs to be modernized and simplified (e.g. getting rid of the remittance complexity). imho a bottom up approach is vital i.e. an understanding of the motivations and particular circumstances of the various sub-groups of non-doms is the first step to designing an attractive and effective regime (one that generates more revenue).
    
    Projections based on assumptions about human behavior or external events (e.g Brexit) need to be heavily discounted. Also projections about capital gains tax on financial assets need to be realistic given the current corrections and outlook for the next few years (i.e. after a 50% drop in asset values it will take a much greater % increase to even get back to break even).
    
    imho pre-existing assets for genuine temporary visitors should not be rebased at all and for those extending their stay should be 100% rebased (regardless of the ownership chain). Rebasing assets for short term visitors is just as a complex as remittances and maybe even a greater deterrent.
    
    3 years is way too short given competing regimes in the vicinity and UK specific costs (propery ladder ponzi etc..).
    
    Reply
    1. Philippe KIEFFER
      
      September 27, 2022 5:37 pm
      
      I am really not sure that using RBU data to estimate investment income is particularly appropriate eg the investment portfolio of a UHNW non-dom (and the corresponding tax attributes of that portfolio) is very different than the investment portfolio of a city employee….I assume the UHNW would have more unrealized gains on private assets and more flexibility on realization etc… Investment decisions are dependent on the level overall amount of assets and expenses to fund etc…
      
      Reply
Bob Egerton

September 27, 2022 10:19 am

Sounds like an excellent idea. Simple and straightforward to have a 3 year non-resident facility restricted only to those who genuinely have not been resident in the UK before. With regard to offshore trusts, as you say, something has got to be done about them and your proposal seems a good starting point.
I would hope that the Labour Party would pick up your proposals. They say that they are going to tackle the issue of non-doms and adopting your proposals would seem to be a good way to go.
Also, the whole issue of trusts needs to be addressed, both offshore and onshore. A starting point might be that all trusts should be registered, with trustees and beneficiaries named in a public register similar to Companies House. If people don’t want to have their names published, the answer is simple – don’t get involved in a trust.
Keep up the good work.

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