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Non-dom changes: a little more clarity?

We recently asked whether the end is nigh for the non-domiciled tax regime if the Labour party form a UK government later this year. Labour MP and Shadow Business Secretary Jonathan Reynolds shed a little more light on the matter in a recent interview with the FT. So, what more do we know and how are we advising clients to prepare for the coming changes?

A less generous regime

Mr Reynolds stated that Labour plan to replace the current non-dom regime with a “modern regime for people who will be in the country for a short period of time” and suggested that the tax-advantaged status would apply to an individual’s first four years in the UK.

We assume that the tax advantage would remain similar to the current remittance basis, which only non-domiciled individuals can claim. Those claiming this basis of taxation are subject to tax only on their UK income and capital gains, with their non-UK income and gains excluded from UK taxation unless those funds are brought into (‘remitted to’) the UK.

Moving from domicile to residence?

However, in describing the non-dom regime as from the “colonial era” Mr Reynolds may be signalling that domicile may no longer be the crucial factor in accessing the remittance basis of taxation. A person’s domicile is the jurisdiction in which they have their roots, or that they consider to be their permanent home. It is distinct from their tax residence, which is determined on an annual basis.

Labour may instead base eligibility for the remittance basis on a person’s residency history. This would be consistent with the general rule that the scope of income tax and capital gains tax is tied to tax residency.

There is precedent for this approach in the temporary non-residence rules. These rules only apply to individuals who leave the UK having been resident for four out of the seven tax years preceding the year of departure. Labour may apply this concept in reverse, so that the remittance basis is available only to those arriving in the UK having been non-UK resident for a set number of years.

Inheritance tax and domicile

In contrast to income tax and capital gains tax, the scope of inheritance tax is tied to an individual’s domicile. Someone who is UK domiciled is subject to UK inheritance tax on their worldwide assets, whereas someone who is non-UK domiciled is only subject to UK inheritance tax on their assets which are sited in the UK.

Unless Labour are also planning a major upheaval of the inheritance tax regime, it is very unlikely that this concept will change. Therefore, even if the concept of deemed-domicile is no longer relevant for income tax and capital gains tax, it should remain for inheritance tax. This could mean that non-domiciled individuals are subject to inheritance tax on their worldwide assets after just four years of UK tax residency, down from the current 15 years.

What planning can be done?

Where a non-domiciled individual with significant non-UK assets is approaching the point at which they become deemed UK domiciled, they can put these assets into an offshore trust. This shields these assets from UK inheritance tax even after the individual becomes deemed domiciled, subject to some strict criteria.

If 15 years is to be cut to four years, many people may wish to accelerate this planning. It is important, though, to consider the position should the person wish to leave the UK and how that trust might be treated in the jurisdiction to which they intend to move. Professional advice should be sought as early as possible.

Possible impacts of the changes

Labour believes that £2bn a year of additional tax can be raised by restricting tax advantaged status to four years rather than 15 years. However, this is predicated on people remaining in the UK rather than moving elsewhere. Spain, Portugal, Italy and Greece (to name a few) have their own, more generous schemes that many would find attractive.

Labour have promised to consult on their proposals but have said that they are committed to change. Despite the lack of detail, the direction of travel for the non-domiciled is clear, and we advise preparing now for the changes to come.

Posted By Aidan Roberson

23 February 2024

Aidan Roberson
Senior Manager, Tax Department