As a result of Britain's recent mini-budget, UK PM Rishi Sunak has levied a higher tax burden on British taxpayers than at any time since the 1950s. However, one group of wealthy expatriates is sighing with relief…the Non-Doms. But rather than relaxing should Non-Doms be treating this as a last ditch opportunity to prepare for the inevitable? argues David Lesperance, founder and principal of international tax and immigration advisers Lesperance & Associates.
To begin at the beginning, the wealthy in the UK have - since the days of Prime Minister Pitt in 1798 - been divided into two separate groups: Non-Domiciliaries and UK Domiciliaries.
You will note the careful lack of reference to "Income Tax" in the anodyne phrase that covers the first group, the "Remittance Tax Basis." This income tax rule has been in place since the Pitt Government wished to attract investment back in the UK by wealthy ‘nabobs' who had retired from the East India Company (and associated wealthy trading houses).
Pitt was under severe pressure to raise funds for prosecution of what everyone called "Boney's War". Giving a major tax break to the nabobs seemed a very sound way to raise additional funds, with no political blowback.
The Remittance Tax Basis is the main reason why, ever since, the UK has enjoyed hosting more than its fair share of the world's wealthiest people.
The Remittance Tax Regime only requires Non-Doms to pay:
a. UK income tax on their UK source or remitted foreign income, and
b. UK estate tax on their UK in situ property.
Along with paying tax on this basis, the major economic benefits of Non-Doms to the UK have been consumer spending and investment. Accompanying their high levels of UK spending and investment are VAT, property and other tax revenues. Not to mention the vast array of service industries which cater to their wide range of needs.
Until recently, this arrangement has been equally satisfactory to Conservative, Labour (and Coalition) governments.
In contrast, UK Domiciliaries pay:
c. income and capital gains taxes on their world-wide income, and
d. estate tax on their world-wide assets
So clearly there are substantial financial benefits accruing to Non-Doms…
But for how long will Non-Doms be able to continue to receive their privileges? The answer depends, firstly, on the actions of the two major parties in preparation for the next General Election - due by January 2025 at the latest. Labour has already made its own public commitment.
Labour has confirmed they will kill remittance taxation if elected..but will the Tories also change or eliminate the regime?
Sir Keir Starmer, Labour's new leader has recently reconfirmed that Labour will kill the Remittance Tax should they win the next election. The unknown questions are two: when will this election be? And what attitude will the Conservatives take to the Remittance tax in the meantime?
The election itself will follow legal precedent: it has to be held at the very latest by January 2025. UK voters are not renowned for queuing at the polls in snowy January with goodwill in their hearts. Pundits currently assume an election slot in autumn 2024. Not that far away...
The second issue - the attitude of the Conservatives to removing the tax-break - was somewhat recently clarified. Jeremy Hunt, Chancellor, defended resisting moves to force Non-Doms to shoulder more of the burden, as he warned of a "challenging" two years ahead for households.
After a frosty reception to his plan in the autumn statement to drag six million people into higher tax rates while the UK plunges into recession, the Chancellor said the strain could not fall on only "a very small group of very rich people".
Having been criticised by Labour for not abolishing the non-domicile status enjoyed by nearly 70,000 super-wealthy people, Hunt avoided being drawn on how closely he had looked at the idea.
"HMT [His Majesty's Treasury] did not tell me it was going to help the economy to do this," he told BBC Radio 4's Today programme.
Hunt said he did not think abolishing the Remittance tax "makes sense", and claimed that while it might be politically popular, it would be the "wrong thing" for jobs and prosperity.
He pointed to similar schemes being set up across Ireland, France, Spain and Portugal and claimed that super-wealthy people would move to spend more of their money in those countries, adding that he did not want to damage the UK's attractiveness. However,
Hunt did leave himself the ability to change his mind on the subject…. should he get further information.
Hunt's final remark echoes many decades of behind-the-scenes discussions by Tory donors, ministers and advisers.
To be blunt, both the Non-Doms and ministers know the advantages that exist for both parties. "Political funding" is another useful phrase to keep in mind for such discussions. However that will not stop the politics of envy and wealth-baiting from regular Parliamentary duels in future.
The trouble for Tory Prime Minister Rishi Sunak is that he is not just rich, but that he is - to the average Briton - what they term "stinking rich." The average Brit might envy an industrialist his $50 million or even $100 million... but PM Rishi has a declared worth of over £730 million.
His wife Akshata Murty - daughter of one of the richest IT billionaires in India is a Non-Dom who it is estimated saves £20 million in UK tax annually. Such figures have naturally inspired populist blowback. Labour has already started printing the campaign signs, "Its Legal….but is it FAIR!"
PM Rishi has in recent weeks (for example) been publicly contrasted with ultra-wealthy British citizens who in the 1920s made patriotic donations intended to pay off Britain's National Debt after Word War I.
A scheme was originated (anonymously) by Baldwin, then Financial Secretary to the Treasury, to invite wealthy members of society to join in meeting gigantic amounts already owing. Just over £1 million was raised at various stages some 90 years ago. Today it is said to be worth over £400 million.
The gift was given so as to accumulate until it was sufficient to "pay off the National Debt" or with the support of other funds. Inflation over the many decades since has made this a challenging task: the £400 million would pay off only 0.00024 % of the current National Debt.
There was an interesting echo of the debate about the abolishment of the Remittance Basis in the London Sunday Times recently, when columnist Dominic Lawson, (son of Margaret Thatcher's successful Chancellor Nigel), recounted his own Non-Dom tale from the 1980s.
In 1988, apparently, Chancellor Lawson and his No. 2, Norman Lamont, determined to end the Non-Dom status once and for all. The announcement had been planned for that year's budget. This budget was famous for its reduction of the top rate of tax from 60 percent to 40 - but what happened to the Non-Dom matter? "Two words: Margaret Thatcher!" writes the younger Lawson.
Lamont told him recently: "When the Greek shipping merchants heard what we were considering, they wined and dined Thatcher, who was horrified to hear what her government was planning to do! Actually, I now think that Margaret had a point."
What he meant was that if the ship-owners (the oligarchs of the 1980s) had upped sticks, it could have deprived the country of a lot of revenue. Some of the tycoons were also also known to be significant donors to the Conservative party...
So, what now for the Remittance Tax basis? The next real test will be the general election. And in view of the strident views of the Labour leadership (by far the likely winners at this stage!) backed up by Scotland's SNP, they will win the relevant vote.
A wildcard move would be for the Tories to significantly alter or even kill the Remittance Basis in order to take the wind out of Labour's sails (and the spotlight off the Prime Minister and his wife!).
This type of action is not unprecedented as then Tory PM David Cameron and his Chancellor George Osbourne did the same thing to deflate the Non-Dom scandal of their era….Lord Michael Ashcroft the then Chairman of the Tory party.
Four steps for Non-Doms to prepare for the possible/probable loss of the remittance basis.
The first step that Non-Doms need to do is to give themselves some perspective on their personal cost of the loss of the Remittance Tax basis. This involves having their accountants "run the numbers" of the fiscal damage should they be taxed on the ordinary basis. This will give them a baseline.
The second step is to develop a Backup Plan which will not only match the tax savings benefits enjoyed under the Remittance tax basis, but which meets the entire family's personal and business needs and lifestyle.
These plans can be quite complex and might find various adult family members remaining in the UK living or studying and paying tax in the future under the ordinary tax system.
The other family member(s), who may own or control the income and capital gain producing assets, will themselves leave the UK for another tax jurisdiction which has a tax favourable regime.
Along with being able to reproduce the lifestyle they enjoyed in the UK on a tax favourable basis, the new jurisdiction would ideally have a tax treaty with the UK. Tax treaties can not only be useful in reducing withholding taxes etc. but are also useful as shields to be used against any HMRC claims of continuing UK tax residence.
As a practical matter these future tax homes are rarely if ever, the individual's original tax home. This is because unfavourable tax treatment may well have been the motivating factor in originally moving to the UK under the Remittance basis. In other cases, it is concerns beyond taxation.
This is true for Russians, Saudis, Chinese, and Indians who have no interest in returning to be under the control of their original governments. It is worth pointing out that a large number of the Non-Doms who are listed on The Times Rich List are originally from these countries.
Along with serving to continue living on a tax favourable basis, a Backup Plan can also be used for succession planning and asset protection.
The third step is to compare the costs of actually implementing the customised Backup Plan against the fiscal damage that would result from the loss of the Remittance basis. Similar to buying fire insurance, once one compares the "premium" (i.e. cost of a Backup Plan) against the potential/probable loss, the decision to move forward is obvious.
As with buying fire insurance, the implementation of the Backup Plan does not mean that one wants the Remittance Basis to disappear. It simply means that should this occur (which is highly probable), the family has the option of implementing the Backup Plan instantly.
The fourth and final step is to actually construct the Backup Plan. It is worth noting that this step (which usually involves securing new residence and/or citizenships) takes from several months to even a year to put into place. When you add on the cost of the first three steps, it is immediately apparent that there is not much runway until a potential Labour election victory (or a Tory "own goal").
In closing, in considering a Backup Plan Non-Doms and their advisors need to look at the situation in a realistic and dispassionate manner.
Too often, the issue of the future of the Remittance Tax basis is tainted by a prejudice of wanting it to continue rather than a cold analysis of the probability of its demise.
Too many underestimate the danger and lull themselves into a false sense of security because it has been in place for so long or they think that the actual loss of the Non-Dom community would be economically devastating to the UK.
They need to remember that politicians all too often implement populist policies for short-term election benefits. Rarely are the long-term impacts even considered or discussed. A Backup Plan is excellent insurance against such populism.
By David Lesperance, founder and principal of international tax and immigration advisers Lesperance & Associates
