With plenty of noise on the possibility of the chancellor announcing a significant change to the non-dom rules in the Spring Budget next week, Rachel de Souza, tax partner at RSM UK, asks what Jeremy Hunt might do.
Currently, non-doms can choose to be taxed in a different way to UK doms. UK doms pay tax on their worldwide income and capital gains. Non-doms also pay tax on UK source income and gains, but can elect only to be taxed on foreign income and gains if these are ‘remitted’ to the UK; this is known as a ‘remittance basis claim’.
At present, the claim can be made at no tax cost for the first seven years of UK residence, then at a charge of £30,000 per annum for the next four years, and £60,000 for another two years. Once non-doms have been UK resident for 15 years, they start to be taxed on the same worldwide basis as UK doms.
So, what could the chancellor do?
The boldest approach would be to scrap the remittance basis system entirely and replace it with a new system. Going forward, anyone moving to the UK could have the option to pay a lump sum amount of tax which covers all their non-UK source income and gains.
The amount of the lump sum is debatable, but £100,000 per annum (or equivalent) is used in other countries and so it could be set at that level. The lump sum option could be time limited so that it is only available for, say, the first 10 years of UK residence, which is similar to the existing remittance basis rules.
This approach would have the benefit of raising revenue without scaring very wealthy non-doms that currently live here into moving overseas.
In addition, revenue would be raised from non-doms who do not have sufficient offshore income or gains to justify paying the charge, as they would now be taxed on their worldwide income and capital gains.
An alternative approach would be to retain the remittance basis but reform access to it. This could be done by bringing forward the timing of when the charge to access the remittance basis applies. The chancellor could introduce a lower charge of, say, £10,000 from the year of arrival and increase the charge for each subsequent year until the remittance basis is no longer available. If we follow the existing rules, that would be at year 16, but the length of time the remittance basis is available could be reduced to, say, 10 years.
Again, this approach would raise revenue by making more people pay and by encouraging more individuals to opt out of the remittance system altogether.
From a tax perspective, both options have advantages and disadvantages, but both would also be relatively easy to introduce and to operate. From a political perspective, the lump sum option has the added advantage of removing direct tax breaks for non-doms entirely, pre-empting Labour’s plans of scrapping the non-dom rules.
On the assumption that both options would raise meaningful sums of revenue, the chancellor will have the opportunity to allocate it for specific purposes. Labour would then either have to change its plans to use the revenue it expects to raise from scrapping the non-dom regime to fund breakfast clubs and the other measures they have announced, fund those costs from elsewhere, or reverse the chancellor’s proposals. Whichever choice Labour makes would provide an opportunity for them to be attacked.
Absent from all of these discussions is the question of what the effect of changing non-dom policy would have on non-doms themselves. The reason for offering preferential treatment is because governments have believed that doing so provides an overall economic benefit to the UK. There is no reason for thinking that this broader picture has changed, so changes to the existing system could end up costing the Treasury more than it brings in.
By Rachel de Souza, tax partner at RSM UK