Anyone following UK politics or tax policy would be well advised to remind themselves of Heraclitus' insight. As we contemplate what many are understandably terming the most important election in decades, let us take a moment to take stock of the possible implications for us, our clients and the country – and, crucially, what, if anything, we should be doing or preparing to do around this.
What might be in store for non-doms?
Before looking at such specifics as there are, two points really need to be made. First, even if the non-dom rules are abolished, clients and advisers alike should remind themselves that there is much effective planning to be done for international clients even if all offshore income and gains are taxed on the arising basis. Second, politicians and policy makers might want to reflect on the huge contribution non doms make to the economy (at least £8bn on recent estimates) and that at least some of them will consider other jurisdictions (and not just low tax jurisdictions) where there is greater tax certainty as increasingly attractive. For this reason a pledge for no more tinkering, from all parties, would be a great stride for stability (and reducing the still looming £90bn deficit).
At the risk of sounding trite, the general consensus is that the election result really is too close to call. Nonetheless, prompted by Miliband's announcement on 7 April that if Labour form a government they will 'abolish non-doms', it is reasonable to conclude that change is in the offing, whoever forms a government. The Conservatives have not criticised the essence of the proposal but rather questioned the specifics, and we know that the Liberal Democrats propose, at the very least, a significant increase in the remittance basis charge (up to £150,000 p/a for those who have been resident for 17 out of 20 years).
Allied to that the IFS has said declared main parties' tax plans as 'incoherent, opaque and vague'.
What about specifics?
The devil is always in the detail, and detail is what we so painfully lack at the moment. Thus far, public discussion has focussed on direct taxes and practitioners have anticipated that inheritance tax would not be a key focus. However, this cannot be assured and we are given to understand that a root and branch reform of the remittance basis, as contemplated by Labour, will involve a serious change to the present rules where by non doms are only subject to UK IHT on their UK assets until they have been resident for 17 out of 20 years.
Based on the policy announcements however it is reasonable to conclude that in a Labour led government:
- Draft legislation amending the remittance basis (or whatever modified version of it is put in place) will be circulated for consultation very soon after a government is formed – indications are that civil servants have been told to consider legislation in readiness for this. This will likely set out as follows:
- The remittance basis will apply only to short term residents;
- Thereafter, all UK residents offshore income and gains will be subject to tax on the arising basis;
- Rationally, historic income and gains should remain unaffected unless remitted but this cannot be confirmed;
- For longer term residents advisers will have to consider traditional deferral structures such as those presently used for domiciled clients, including companies and insurance structures, where there is a concern about the arising basis applying to all offshore income and gains;
- There is clearly an open question as to whether existing IHT protected structures will be grandfathered;
- One would anticipate there to be a reasonable consultation and transitional period for existing remittance basis users to re arrange their planning as sensibly as possible.
However, regardless of the particular hue of the government after 7 May, there seems to be a consensus building that the common law concept of domicile allows too many long-term residents in the UK to be taxed as if their 'home' was elsewhere and those rules need to be updated and restricted.
What should non-doms do now?
At the risk of stating the obvious, speculative planning runs the risk of unpredictable consequences. If one has significant unrealised gains offshore, one option is to rebase where possible, or to have rebasing plans in readiness for prompt action after the election. Other than this, a wait and see approach will allow measured planning to the extent possible.
That said, essentially we should all prepare to advise our current remittance basis clients on what planning would look like if they were domiciled – hence a focus on offshore deferral structures will gain prominence.
What about the doms?
UK domiciled persons and non-UK resident persons will also be keen to understand the implications of some potential high profile changes to the tax rules.
The mansion tax
The idea that the UK's tax system should put an increased burden on taxpayer's capital has gained support across the political spectrum in recent years, with the introduction of the Annual Tax on Enveloped Dwellings applying to residential properties owned by companies and most recently the introduction of capital gains tax for non-resident owners of residential property. Again it is likely that these taxes will be seen as increasing sources of revenue for future governments. In addition though, Labour and the Lib-Dems have committed themselves to an annual mansion tax on high value property.
The spectre of the 50% rate of income tax on high earners also looms large in the Labour Party manifesto. By contrast the Conservatives propose to bind themselves not to increase income tax, VAT or national insurance. The Lib-Dems meanwhile focus on raising the personal allowance rather than a commitment either way in relation to the higher rates of tax, leaving plenty of room for negotiation after the election.
It's a case of steady nerves until the election and we will send out further updates as soon as there is some degree of clarity after 7 May.
As was the case in 2010, given that it is unlikely that any party will secure an outright majority, it will remain to be seen which policies survive the complex negotiations which will go into making up a coalition or minority government. We should expect an 'emergency budget' in June and again, as in 2010 it is likely that many tax changes will have immediate effect rather than wait until the start of the new tax year.