Whatever happens after the election, there will be some changes to the non-dom regime. Neither we, nor the politicians, know what they will be. We would advise against knee-jerk reactions, but in the calm before the storm, we look at what we know so far, when changes might be introduced, and what longer terms options there might be.
Who said what?
- Labour: They would “abolish non-dom status so that all those who make the UK their home pay tax in the same way as the rest of us”. SNP have confirmed that they would support this. Ed Miliband has also said that they would introduce temporary residence rules for those genuinely in the UK for a short time. Periods of two to five years have been mentioned and that there would be some form of consultation process.
- Conservatives: They would increase the annual remittance basis charges, “tackle abuses” and abolish “inherited” non-dom status. Their view is that this would be sufficient to mitigate any unfair advantages granted by the non-dom regime. This would effectively mean that individuals born in the UK to non-dom parents would lose the right to claim non-dom status. In the 2015 Budget George Osbourne also announced that they would consult on requiring the remittance basis to be claimed for a period of three years, instead of on a year by year basis.
- Liberal Democrats: They would also end the ability to “inherit” non-dom status and increase the remittance basis charge (increasing the charge from £30k to £60k for those who have been in the UK for 7 years; from £60k to £100k for those who have been here for 12 years; and from £90k to £150k for those who have been in the UK for 17 years).
Given this, it is unsurprising that a number of UK resident non-doms have indicated that they will leave the UK if the regime changes to their detriment, and some are already making plans to do so. The bigger, long term loss to the UK economy could be those who have chosen to delay coming to the UK, and those who decide not to as a result of changes to the regime.
The proposed changes are in fact merely the latest in a series of changes that have slowly restricted the regime over the past two decades. Many of those who could still take advantage of the non-dom regime ceased to do so as the cost of the remittance basis charge increased. More would drop out if it could only be claimed for three years at a time.
The key issue is the proposed very short period for which the remittance basis would be available. In many jurisdictions there is a period of several years where a beneficial tax regime applies after arrival. If the UK’s future offering is worse than that of other attractive jurisdictions, then in these days of ever increasing mobility, the UK will lose one of its long term competitive advantages.
Labour have indicated that they would want to have draft legislation available for the first day of a Labour Government but that would likely lead to the start of a consultation period. It is also possible that draft (or even actual) legislation could be introduced in an emergency Budget within 100 days of a Government being formed.
However, given the complications of introducing substantive changes in this area, it is likely that any major changes would be consulted on, and delayed until after the Autumn Statement. These types of changes would also usually have a transitional period.
Given the range of unknowns here, we advise against any knee-jerk reactions. However, some pre-planning should be considered. This would be particularly relevant for those who have been in the UK for many years, and those who acquired their non-dom status from their parent, but have spent most of their lives in the UK.
The option that is most often discussed, is to leave the UK. However, this takes significant planning, and deciding where to move to is usually harder than the decision to leave the UK. Whilst the remittance basis provides a beneficial tax regime there are many other reasons why wealthy individuals come to and live in the UK. Our UK tax residence app can help to determine how many days an individual can spend in the UK, without being UK resident.
For those staying in the UK, other planning issues that should be considered whilst the remittance basis applies include:
- realising existing gains;
- reorganising or discharging loans;
- making distributions from offshore trusts outside the UK;
- making family gifts to fund UK expenditure;
- funding offshore structures.
Even if the availability of the remittance basis were to be restricted, many non-doms will already have offshore structures which are used to protect offshore income and gains from UK tax (and in some cases from inheritance tax). It is unlikely that those funds could be brought into charge, unless remitted to the UK, so planning may be required to protect those in the longer term. Different planning will apply to the old funds, than the new, and these will need to be kept separate.
For those non-doms who cannot, or choose not to take advantage of the remittance basis, other planning is available. In many cases if a tax charge cannot be prevented, then it may be deferred, or charged to a lower rate of capital gains tax, instead of higher rates of income tax. Planning options would include:
- investing in funds that generate low income, and long term gains (usually reporting funds);
- offshore life bonds (potentially held in trust);
- long term low income / high growth assets;
- UK investment companies, used to roll up investment returns;
- pension planning;
- gifts to family members, particularly where they are non-UK resident;
- use of offshore trusts for family succession, particularly using income generative assets;
- investments which benefit from tax incentives;
- Family Limited Partnerships.
Where possible, we would advise clients to hold off implementing any planning at this stage, but they should be aware of how their position would change in the event that the remittance basis ceased to apply – which according to Ed Milliband, could be the position for everyone who is in the UK for more than a few years.
Given the uncertainty on timing, regardless of the outcome of the election, individuals need to consider their options, and be in a position to implement rapidly, should the need arise.