28 May 2010

What now for the Non-Doms?


What now for the non-doms?

The Conservative and Liberal Democrats published their “Programme for Government” which contained a promise to “review the taxation of non-domiciliaries”, but no hint as to what tax changes this could
foreshadow. The Conservative Manifesto had promised to “restore the tax system’s reputation for simplicity, stability and predictability”, but that will apparently have to wait.

  

What did the parties’ manifestos say?

The Conservatives

The Conservative Manifesto contained little detail on the taxation of non-doms, referring only to their intention to introduce “a simple flat-rate levy” to pay for the increase in the nil rate band. This built on George Osborne’s 2007 proposal for a levy which the Labour Government ultimately introduced as the £30,000
‘remittance basis charge’, ending its own review of the taxation of non-doms that had continued for a number of years.

The Liberal Democrats

The Liberal Democrat Manifesto had proposed that the remittance basis regime should not be available to non-doms who have been resident in the UK for more than seven years. This would be similar to the deemed domicile regime for inheritance tax purposes that treats non-doms as UK doms (for inheritance tax
purposes only) after they have been resident in 17 out of the last 20 tax years.

  

What will be the outcome of the review?

We can only speculate as to what the outcome of the review of the taxation of non-doms will be. Clearly both the Conservatives and the Liberal Democrats are committed to the taxation of non-doms and with taxes being increased for UK doms on the cards, tax increases for non-doms would also seem likely to ensure that any pain is evenly spread.

No change

A review that recommends the status quo would seem unlikely for a new Government, but both parties will be conscious that non-doms are key to maintaining the UK’s position as a global financial centre and to reflect in personal taxation their intention to “to create the most competitive corporate tax regime in the G20”, by maintaining the competitive advantages of the current system. A review does not necessarily imply change and until Alistair Darling’s hand was forced by George Osborne, the Labour Government had not seen the need to change the rules. The same logic may still apply.

Complete abolition

At the other end of the spectrum, neither of the parties proposed the abolition of the non-dom regime in their manifestos and the idea of the two parties finding common ground in abolition would seem to be unlikely. The non-dom regime is one of the oldest features of the UK’s tax system and has been in
place since the introduction of income tax in 1798 and the factors that have always made it attractive are still relevant.

A deemed domicile for income and capital gains tax purposes

An introduction of the Liberal Democrat proposal for a sunset provision for non-doms has been mooted in the past and may be an option for the Government to adopt. This could allow the UK to maintain a competitive edge in attracting individuals to the UK in the short term, but ensure that long-term residents
of the UK would be taxed on an equal footing. The question would be of course – how many years would it take, would it be the Lib-Dems’ 7, the current 17 required for IHT, or somewhere in between?

A flat tax regime

Many countries (notably Switzerland) operate a flat tax regime, allowing individuals moving to that country to cap their liability to tax at a fixed amount. This was the proposal that George Osborne announced at the Conservative Conference in 2007 and could yet be the outcome of the review. It
would have the advantage of raising revenue and being straightforward to administer, at a stroke fulfilling the Government’s commitment to make the tax system “more competitive, simpler, greener and fairer”.

An increase in the remittance basis charge

The review may not recommend any substantive change to the non-dom rules, but, with an increase in capital gains tax almost certain and VAT very likely, there will be pressure for non-doms to be seen to make a greater contribution to tax revenues, which could be accomplished by increasing the remittance
basis charge.

Of course a combination of these options is equally possible, but what is clear is that the future for non-doms is once again uncertain. It is to be hoped that this will at least begin to be resolved on 22 June.

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