The so-called non-dom regime that has played a significant role in the UK’s tax framework for decades may be on its way out. This perhaps somewhat antiquated and arguably no longer fit for purpose regime has for many years allowed wealthy “foreigners” living in the UK to benefit from favourable tax treatment on their foreign income. The approximately 70,000 non-UK domiciled individuals currently claiming such tax status on their UK tax returns (broadly speaking those who reside here for a fixed period and ultimately intend to leave the UK) are only liable for UK taxes on UK source income and gains; their foreign income and gains are subject to the remittance basis of taxation meaning they are taxed only to the extent that they bring this wealth to the UK. A system which encourages wealthy individuals to accumulate wealth outside of the UK and punitively taxes them for bringing funds to the UK seems counterintuitive (leaving aside a discussion around the complex Business Investment Relief rules introduced in April 2012).


THE STORY SO FAR

Recent public scrutiny around Akshata Murphy (Mrs Sunak) has called the effectiveness of this regime once again to the forefront (there were significant attempts at reform back in 2008 fervently opposed by Greek shipowners and again sweeping changes came in in 2017) with political promises to enhance transparency and equality in the tax system an undeniably challenging objective to achieve whilst also importantly not compromising the attractiveness of the UK (London primarily) as a well positioned and well established global financial hub. Migrants represent a significant percentage of high income, high productivity occupations in financial and professional services in banks/ hospitals alike and there is no desire to haemorrhage worker bees. Reportedly wealthy individuals are already leaving the UK in favour of establishing domicile status in tax havens like Monaco, Switzerland, and Dubai. Migration consultancy Henley & Partners and data firm New World Wealth say more than 12,000 rich individuals have left the UK since 2017. The 2017 reforms significantly limited the tax advantages for long-term non-doms by introducing the concept of deemed domicile for income tax and capital gains tax so once UK resident for more than 15 of the previous 20 tax years, individuals could no longer shelter wealth from these taxes. The changes to the taxation of excluded property trusts (beyond the scope of this article) also further eroded the benefits for some long-term UK resident non-UK domiciled individuals.


KEY FISCAL OBJECTIVES

It must be that we have moved away from a tax system pinned to an archaic concept of “foreignness” (the idea of “domicile” could easily just be put back into an area of law distinct from tax where Dicey originally did not intend for it to live!) and when we consider the two Chelsea bankers living next door to each other, one originally from Germany and one with strong ancestral roots in the UK, they ought to be taxed on the same basis. But what if one plans only to stay here for 5 years- should he be treated differently to the other? It is also true that we want wealth creation and investment in the UK and there is a balance to be struck.

Will abolishing the non-dom regime prompt a significant mobility response? And what ought we to replace it with some kind of unwieldy (particularly when considering double tax treaty benefits) US style citizenship regime? A Canadian style exit tax on departure? Or a Swiss style arbitrary annual charge to benefit from a more favourable tax regime?

There are many questions to engage with before significant steps are taken and considering the context of the regime and where it sits as part of a wider fiscal policy is vital. When raising questions around the future of the non-dom regime one might consider its long-term usefulness as a potential mechanism to tax and encourage wealth re-distribution in this country? Any reform of the non-dom rules ought to interrelate to the proposed review of IHT- a tax on the transfer of wealth. What will no question cause a non-dom to flee the UK would be a 40% tax on death on his worldwide estate not long after he arrives here!

What about an all-round more effective system of taxation around accumulated wealth rather than income creation. That would prompt serious consideration around trust protections even since 2017 it is still possible for well advised non-UK doms to shelter significant wealth in trust wrappers. The non-dom regime should not be reviewed or reformed in a vacuum there is a wider conversation to be had and the atmosphere is as ripe as it ever has been for whole scale long lasting reform. It must be that to protect the future of our position on the global stage there needs to be serious political and economic certainty.


CONCLUSION

Striking the right balance between maintaining competitiveness on the global stage (keeping a keen eye on regimes promoted in competing jurisdictions) and amending a somewhat broken non-dom regime to make it fit for purpose in the modern world will require careful consideration and even more careful drafting of any new rules with the correct amount of attention paid to any transitional period. What is needed is a cross party consensus and not faux attempts at lazily drafted legislative reform carrying a distinct whiff of vote winning by simply saying what the often-ill-informed populace want to hear.