Tax changes to take the heat off non-doms

This article was first published in the February 2016 UK edition of Accounting and Business magazine.

Could there be an end in sight to the uncertainty that has been hanging over the non-domiciled community (the ‘non-doms’) ever since tax avoidance rose to near the top of the political agenda in the UK? That is the hope, as tax advisers wait to see the results of the consultation that followed the publication of last September’s proposals in the wake of the 2015 Budget.

Although the chancellor didn’t mention it in his autumn statement, draft legislation was set out in the consultation document, Reforms to the taxation of non-domiciles, with the intention of including it in the 2016 and 2017 Finance Bills. The document and the legislation mark the end-game of an argument that reached its height during the 2015 general election, when the major political parties vied for the best way to deal with a situation that was widely perceived as unfair to the vast majority of UK taxpayers.

The most significant change will be the removal of non-dom status for individuals who have been resident in the UK for 15 out of the previous 20 years. Such individuals will be ‘deemed domiciles’ and required to pay UK tax on their personal foreign income and gains in the same way as everyone else who is tax-domiciled in the UK. The government also intends that no UK-born individual with a UK domicile of origin should be able to claim non-dom status while living in the UK, even if they have previously left the UK.

There is, however, a get-out clause for those who were not born in the UK and are approaching the 15-year limit: if they leave the country for at least six years, the clock is wound back to zero again. Going abroad for six years might be a drastic step to take, but many tax advisers agree that non-dom status remains attractive and might be worth the upheaval if taxation is a significant factor in where an individual calls home.

The new regime will alter the ‘remittance basis’ rules that have been in place since 2008 (see box). 

Having your cake

‘The approach of the government has been to try to be fair about the payment of tax by non-UK domiciliaries – in particular, saying that individuals cannot be non-UK domiciled indefinitely,’ says Andrew Cockman, a director in Grant Thornton’s national tax office. ‘But the government also recognises that the non-dom community helps to develop businesses and can be a very powerful agent for prosperity. So the government wants to ensure that there is an incentive for these people to remain in the UK, and allow them to preserve any tax-efficient arrangements they may have set up outside the UK.’

However, Cockman warns that the government’s proposals are ‘extremely involved’, particularly around how offshore trusts would be taxed once a non-dom becomes a ‘deemed dom’.

Despite the inevitable complexities, non-dom status could still be an attractive option for wealthy individuals coming to the UK. KPMG’s head of private client business Dermot Callinan says: ‘It is definitely still worth having. It is not that the status is being withdrawn, it is simply being limited. David Gauke, the financial secretary, was careful to say that the government wants to attract talented people to UK, and refers to the non-domicile rules as an important feature of the UK’s internationally competitive tax system. The UK is in very stiff global competition with other countries that want the world’s wealthy to become resident, and tax advisers are being asked to compare and contrast the UK with other jurisdictions.’

The new rules, Callinan says, will go some way to making the system ‘just’, with non-doms having to pay their fair share of tax. If the rules draw a line under the issue, then the non-dom community will be able to look forward to some certainty over their tax affairs, even if they ultimately have to pay more tax.

‘It will be the calm after the storm,’ says EY’s private client tax services partner David Kilshaw. ‘As with 2008, when the remittance charge was introduced, there will be some turbulence, but I think it will settle down and we will get some certainty. Our experience is that at the moment non-doms are looking at this calmly; they are not fleeing the country. They recognise that this will be the new environment.’

Clearly, non-doms will be taking other non-tax considerations into account when considering where they will be resident. The strength of London alone as a financial centre is a major selling point of the UK, alongside its education system and relatively stable political system.

Some tax professionals are keen to stress that there needs to be a holistic review of the non-dom regime and whether the UK as a whole benefits from having such attractive incentives, even if they are time-limited. As ACCA’s head of tax Chas Roy-Chowdhury says: ‘Nobody seems to have carried out a clear cost/benefit analysis for the UK. If there is no net benefit, then why have the regime at all? If there is no benefit, get rid of it; but if there is a benefit, then keep it, rather than tinker with it. There needs to be a cold, calculated decision.’

Philip Smith, journalist