The UK's non-dom system is on the way out, and now it turns out that the opposition Labour Party – currently far ahead of the ruling Conservative Party in opinion polls – wants to tighten the screws even further on those who have taken advantage of the regime. Lawyers and advisors say this will encourage more of those affected to quit the country.

Yesterday, Rachel Reeves, shadow finance minister in the UK – and who may be in the actual job in a year’s time if opinion polls are reliable – has announced that a Labour government would go beyond abolishing resident non-domicile status.
 
In March, the UK finance minister, aka Chancellor of the Exchequer, Jeremy Hunt, said he will scrap the non-dom system and adopt a four-year temporary residency programme instead. Hunt’s move was seen as trying to “steal the clothes” from Labour; it was also billed as simplifying a regime dating back to the late 18th century. As part of the change, Hunt said a person will be eligible for the new programme it if he or she has lived abroad for at least 10 years. The old non-dom system, under which a person pays no tax on worldwide income that stays outside of the UK, would die. (This news service has commented that such a move is a mistake.)

Reeves wants to go a step further than this. She wants to stop non-doms from being able to move their money into an offshore trust to avoid paying inheritance tax before the ban comes into place in April 2025. The Labour politician said she also plans to remove a 50 per cent discount on the amount non-doms must pay in tax in the first year of the new ban, a measure aimed at easing the impact of the change.

Given the political winds blowing, it is likely that such a change could become law. Lawyers, judging from a variety of commentaries, fear that many HNW individuals will leave the UK. (See here and here for recent conversations about the issues.)

Disappointing
“Labour's intentions to modify the tax treatment of non doms even further than already announced by Jeremy Hunt a few short weeks ago, are disappointing,” Sophie Dworetzsky, partner, Charles Russell Speechlys, said. 

“Specifically, the ability to settle trusts and protect assets from IHT is in their sights, as is a transitional measure with regard to non-UK source income. These measures feel like trying to squeeze out every last drop until there's nothing left.

“The UK operates in an environment of tax competition, and if the UK makes itself yet more unattractive from a tax point of view, we could lose out to other countries, such as Italy, which have more favourable tax regimes. One can but hope this is realised before any legislation is implemented,” Dworetzsky concluded. 

Damian Bloom, partner and head of UK private client at law firm Taylor Wessing, said this change will encourage wealthy people to leave the UK. 

“This further perceived crackdown on non-doms will likely increase departures of both people and wealth from the UK, and reduce inward investment, which will inevitably also reduce tax revenues.

Neither party are currently using the opportunity for reform to introduce a regime that will increase inward investment, raise UK tax revenues and enable the UK to compete against other leading economies to attract the best entrepreneurial talent,” Bloom said. 

The prospects of a squeeze or outright abolition of the non-dom system appears to have already encouraged an exodus, reducing the likely revenue that such wealthy people bring into the country. This effect vindicates, as this publication argues, the "supply-side" economics point that says higher tax rates, beyond a certain point, reduce rather than raise revenues. 

“The recent Budget announcements by the Conservative party about the introduction of a statutory regime to determine an individual’s domicile status (similarly with the existing statutory residence test) were widely welcomed and made good sense: clarity is always welcome. That said, we are already aware that non-domiciled individuals have already left the UK, or are planning to leave this year, as a result,” James Austen, partner at Collyer Bristow, said. 

“The Labour party has today announced further changes, building on the Tory plans, which it will enact if it forms a government after the next general election. The details remain unclear, but the plans as announced seem problematic.

“First, and most fundamentally, it is unclear how so-called `excluded property trusts’ used by UK-resident non-domiciled individuals could be eradicated without a wholesale rewriting of the current inheritance tax regime, which has been in place since 1975. 

“The technical difficulties which would be encountered in implementing this policy are formidable and should not be underestimated. As a result, until the full technical details are known and understood, any tax savings Labour hope to achieve from this change should be seen as speculative,” Austen said. 

Austen was also sceptical about Labour’s plans to narrow the so-called “tax gap” further – the hypothetical difference between the tax actually collected by HMRC and the total amount which might, in theory, be collected if all taxpayers reported their taxes correctly; and everyone accepted HMRC’s interpretation of tax law.  

“Over the years, governments of all parties have provided HMRC with ever-greater powers and investment to tackle tax evasion and avoidance.  As a result, the UK’s `tax gap’ is actually very small in comparison with other advanced economies,” the lawyer said.

“Additional investment in HMRC might well be welcomed by taxpayers in the hope of fixing well-publicised difficulties (such as the unavailable helpline). But, the immutable law of diminishing returns unfortunately means that ever greater investments are likely to be required to chase ever smaller returns from tackling avoidance and evasion,” Austen concluded.

Exodus
Camilla Wallace, senior partner at Wedlake Bell, reckoned that the proposals from Labour’s Reeves would encourage more wealthy people to leave the UK.

"It's likely we will see a surge in wealthy foreign individuals looking to relocate out of the UK; many are already looking to do so prior to today’s news. There is a plethora of other countries with their arms wide open ready to welcome such individuals. Italy, Dubai, Spain, Portugal, Greece, Switzerland – they are all very keen to attract our wealthy residents and arguably have far simpler and more beneficial regimes, for example in some countries you can pay a flat fee for a fixed period of time during which your foreign income/gains are tax free,” Wallace said. 

“If the weather and food are better as well, then the decision for such individuals may not be that difficult – many are already incredibly mobile and have no qualms about relocating to wherever best suits their lifestyle – and assets," she added.