UK non-dom regime: reform, replace or abolish?
4 December 2023 | Applicable law: EU | 3 minutes
This is last in our series of articles on the UK's non-dom regime. Over the past few weeks, we have explored what the non-dom regime is, how it compares with regimes in other jurisdictions and what the major political parties are saying about it. In this article, we take a step back and consider, in the current economic and political climate and with an election on the horizon, what the future may have in store for the non-dom regime.
Let's consider three potential scenarios: outright abolishment of the regime; replacement with a new system, and reform.
Without doubt, the most radical option for the next government would be to abolish the non-dom regime altogether without adopting any alternative system.
While this was a rhetorically appealing position for Labour at the height of last year's media furore concerning non-doms, it is in our view an unlikely outcome. As we discussed in earlier articles in this series, the UK is just one among many countries in the world which offer a favourable tax system to newly arrived taxpayers for a certain number of years at least (or sometimes indefinitely). The United States survives without such a regime, but clearly the considerations are different when you are a global hegemon. For better or worse, there is a degree of competition between nations in the area of personal taxation for wealthy or highly skilled individuals. That competition remains unrestrained by any moderating international framework of the type being developed within the world of corporation tax (in the form of the OECD's Pillar Two). There appears to be a concern, among not just Conservatives but Labour too, that to tax all arrivals immediately on the same basis as long-stayers may put off the wealthy or the highly skilled from moving to the UK. Wholesale abolishment with no replacement system, for now, is not on the table.
In our experience, the non-dom regime remains one of the key attractions for globally mobile clients who are seeking to move jurisdictions. Changes made to the non-dom regime in the past had a measurable impact of the number of taxpayers choosing to remain in the UK. The nuclear option of abolition of the regime would have the effect of both (a) making the UK a less attractive place for non-doms who already live here, resulting in greater numbers leaving the UK and (b) discouraging globally mobile individuals from moving to the UK in the first place.
In the light of the current pressure on the public purse, it would be a brave step to abolish a regime which brings wealth and investment to the UK.
Recent press coverage has identified a number of policy areas where Labour has watered down or dropped ambitious promises over the past few months, a process facilitated by Mr Starmer's consolidation of his control over the party's internal governance structure. This has allowed him to shift policy towards the centre ground in anticipation of the run-up to the next general election (take, for example, the changes in policy on the scrapping of tuition fees and the nationalisation of public utilities).
It looks as if a similarly moderate shift has taken place within Labour's non-dom policy. Early bombastic claims about 'abolishing' the non-dom regime have been abandoned in favour of 'a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent'. And with the polls saying Labour are most likely to prevail at the next election, we may soon see the curtain fall on the non-dom regime before rising again on a very different system.
But what might that replacement system look like? Many questions would need to be answered to build a new regime, not least what its objective actually is. One only has to look to the copycat non-dom regimes which exist elsewhere to see how a better regime might be developed. Would it cease to penalise taxpayers for bringing investment to the UK? Would it look to incentivise the movement of highly skilled workers to the UK? Would entrepreneurs seeking to establish a business in the UK get favourable treatment? How long would it last? Might there even be a cap on the amount of tax an individual could save through the regime, in the same way as there are caps on other forms of tax break? Would the government look to tie the regime in with the UK's visa and immigration system more widely?
Having answered all those questions, the government would then need to decide what would happen in respect of all the existing taxpayers and structures presently benefitting from the non-dom regime and related rules. Should they sweep away all those benefits in one go, leading potentially to administrative chaos and widespread and inadvertent non-compliance? Or would they introduce what lawyers like to call 'grandfathering' rules in order to smooth the transition from the old regime to a new one, allowing existing structures to benefit from historically advantageous treatment but with no new ones being allowed to be set up? A two-tier system would add complexity to what is already a challenging area of tax law for taxpayers to comply with.
Given the complexity of the non-dom regime and related rules, all of these questions and more will need to be worked through in great detail in order to avoid creating significant confusion if and when the regime is replaced.
A third option is to reform the existing non-dom regime.
As anyone who has advised on or been taxed under the current regime will know, it is extremely complex and there is much room for error. While there are technical issues which could benefit from development, the most obvious point of reform would be to limit the number of years during which an individual can be taxed on the remittance basis. Currently, it is only after accumulating 15 years of UK tax residence in a period of 20 years that an individual is no longer allowed to claim the remittance basis. This limit (known as 'deemed' domicile) was in fact only first introduced in April 2017 to counter the argument that too many taxpayers were able to benefit from the regime whilst having spent many years in the UK. It may be thought that, now the pain of its introduction has subsided, the time has come for this limit to be shortened to a period that better reflects the point at which it could generally be thought that an individual has decided to remain in the UK indefinitely (at what point that should be is up for debate: 5 years? 10?). As we commented in an early article in this series, we may well see a review of the regime by the current government and a reduction of the time limit before the next general election, should the Conservatives choose to make this move as a means of neutralising Labour's arguments about non-doms.
Whatever the outcome, we consider it is now very likely that the non-dom regime will not continue exactly in its current form and will be reformed or replaced in the near future, depending on the outcome of the next general election. Whatever the new rules are, we can help you anticipate and plan for the changes, whether you are planning a move to the UK or have been resident here already for a number of years.
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