The Labour Party announced this morning that, if elected as the next government, they would abolish ‘non-dom’ tax status. Our Q&A below explains what a non-dom is and how the system works.
The CIOT is of course strictly politically neutral and nothing in this post should be interpreted as endorsement for or opposition to any particular party’s policy.
What does non-dom mean?
‘Non-dom’ is shorthand for a person who is not domiciled in the UK.
Domicile is a common law concept rather than a UK tax rule. It is used to decide which legal system applies where someone has family or personal connections in different jurisdictions. It’s particularly relevant to marriage, divorce and succession issues.
Domicile is not the same as nationality or citizenship or residence. You can only have one domicile at any point. You can be resident for tax purposes in the UK (for example by visiting regularly or living here for some time) but remain domiciled in another country because an individual’s domicile is broadly the place where he or she has their permanent home.
How do you get your domicile? Can you change it?
Everyone acquires a domicile of origin at birth (most often your father’s domicile) but it is possible (although difficult) to displace a domicile of origin with a new domicile of choice if you settle permanently in a different country and sever all your links with the previous country of domicile.
When is non-dom status relevant to tax?
UK tax legislation uses the concept of domicile in some circumstances to determine an individual's liability to income tax, capital gains tax and inheritance tax.
People who are UK resident and domiciled in the UK are liable to UK tax on their worldwide income and capital gains. However, individuals who are UK resident but not UK domiciled are liable to UK tax on all their income and capital gains which arise in the UK, but have to pay UK tax on overseas income and capital gains only if those funds are remitted to the UK. This is known as the remittance basis of taxation. Very broadly funds are remitted to the UK if a person receives, uses or benefits from them in the UK. The remittance basis must be claimed (except in some circumstances, eg where unremitted income and gains for the tax year is less than £2,000).
There is a charge for accessing the remittance basis where the claimant has been resident in the UK for an extended period. New charges apply from 6 April 2015:
• £30,000 for those UK resident for 7 of the past 9 years (unchanged from previous years)
• £60,000 for those who have been UK resident for 12 of the last 14 years
• £90,000 for those who have been UK resident for 17 of the last 20 years
What about inheritance tax?
Inheritance tax applies to an individual’s worldwide property if an individual is UK domiciled but to their UK property only if an individual is domiciled in another country. In some cases an otherwise non-UK domiciled individual may fall within the UK IHT regime by being deemed UK domiciled for IHT purposes only. This occurs in 2 main circumstances:
• Where a non- UK domiciled individual has been resident in the UK for at least 17 out of the previous 20 years;
• Where an individual remains within the charge to IHT for 3 years after ceasing to have a UK domicile.
In addition a non-UK domiciled individual can in certain circumstances elect to be treated as UK domiciled for IHT purposes.
How many non-doms are there?
As of 2011 (which is the latest figure we’ve found) there were 116,000 non-doms registered with HMRC. Of these 49,000 elected to be taxed on the remittance basis (see above) but only 5,000 – 6,000 of these had to pay the remittance charge. (As stated above you only have to pay the charge if you have been UK resident for 7 of the past 9 (or 12 of the last 14, or 17 of the last 20) years.)
But note that not everyone entitled to non-dom status is included in that 116,000 figure. As an HMRC spokesman explained to the publication Tax Journal: “Individuals are only required to indicate their domicile status where it has a bearing on their UK tax liability; there are a significant number of non-doms who do not indicate their domicile status on their tax return, for example those who chose not to be taxed on the remittance basis.”
In November 2012 Treasury minister Lord Sassoon told the House of Lords: “HMRC only holds information on those individuals who are required to declare their domicile status because it is relevant to their tax affairs. HMRC do not hold any estimates for the number of individuals who are entitled to claim to be non-domiciled but choose not to do so.”
Are all non-doms wealthy?
No, but those who choose to be taxed on the remittance basis can reasonably be assumed to be wealthy / high income individuals.
Are all non-doms immigrants?
No. Many are: some are wealthy entrepreneurs choosing to locate in the UK, some are individuals who come to the UK for employment at all levels of remuneration (bankers and footballers, but also doctors, nurses and fruit pickers), some are students. In theory at least, they are only in the UK temporarily and will return to their home countries in due course. But some non-doms will have been born and brought up in the UK, and inherited their non-UK domicile from their father or even grandfather (it usually passes down the male line). Many in this latter group in particular will gain no advantage from their non-dom status (because they have no overseas income, gains or assets) – it is just an accident of ancestry.
Do other countries have the same system?
Not many. Britain is unusual in allowing permanent residents to remain non-doms. Ireland and Switzerland have similar systems.
How does being a non-dom save you money?
As set out above, you are only taxed on overseas income and gains when you bring it or them to the UK or otherwise enjoy them here. In broad terms, if you don’t bring it to the UK you won’t be taxed on it. To save money the amount of tax you save must be larger than the remittance basis charge (see above) the UK Government currently levies on you.
How much would abolishing non-dom tax status raise?
It’s very hard to say.
As stated above 5,000 - 6,000 non-dom individuals choose to pay the remittance basis charge (RBC) each year. A further 43,000 or so are taxed on the remittance basis but haven't been in the UK long enough to pay the RBC. These are the people abolishing non-dom tax status would affect. It is reasonable to assume those people paying the RBC are opting to do so because it costs them less than paying full tax on their worldwide income in the UK would. However we don’t know how much they are saving because they don’t at present have to declare their worldwide income to the UK authorities. Even if we did we would then need to factor in behavioural effects – that is wealthy people who might leave the country for somewhere with lower tax rates, or who might find other ways of rearranging their financial affairs (eg by transferring assets to other family members). We don't know how many of the 43,000 would pay a significant amount of tax in the UK if the remittance basis were abolished or radically restricted (Labour's proposal).
Could it cost money?
It’s possible, once you take into account knock-on effects. The amount of tax raised from non-doms themselves would almost certainly rise if their non-dom status was taken away (even allowing for some behavioural effects – see above). But the argument made by those who think it might cost the Exchequer money is usually based around the wider benefits of having wealthy non-doms in the UK – employing people, basing companies here, paying VAT and other taxes on the expensive goods and services they consume.
What are Labour proposing?
To abolish non-dom tax status. However they would allow some exceptions for those resident in the UK for only a short period. On his blog, Ed Balls states:
“our plans… do allow for temporary residence for people genuinely here for a temporary period, for example people who are here for two or three years at university. Not to have a short-term option would mean students or business visitors being deterred from coming to our country.”
CIOT Tax Policy Director
Wednesday 8 April 2015