This article examines the recent attacks on the UK's resident non-domicile system and finds the criticisms seriously lacking.

The present UK general election campaign has propelled the issue of what is called “nom-domicile” status and the associated taxation of “non-doms” into prominence. Arguably, this has taken the wealth management industry by surprise. Regardless of the outcome of the 7 May election, the wealth management industry needs to give serious consideration as to what might happen if such status disappears, or whether the 200-plus-year system in the UK will be reformed significantly. This article, by Alex Ruffel (partner) and Tom Barber (solicitor) of specialist law firm Berkeley Law, considers the issues. As ever, this publication welcomes readers’ views and they can contact the editor at tom.burroughes@wealthbriefing.com

The forthcoming election has brought the tax affairs of “non-doms” into the headlines.  The Labour Party has said that, if elected, it “will abolish non-dom status”.  The Conservative party has not addressed the status directly but there are indications that, while it values the contribution of non-doms to the UK economy, it may take steps to tighten up the rules.

The domicile confusion
Domicile is not a tax rule but a concept of English common law that is commonly defined as “permanent home”.  It is relevant in many legal areas. For example, it determines which country’s inheritance laws apply to a UK bank account on the death of the holder.

In English law, every individual is deemed to have a domicile. The starting point is that they inherit their domicile from their father (or mother if their parents are unmarried). Assuming their father does not change his domicile, the individual generally continues to have this original domicile unless they move to another country and form the intention to make it their permanent home.  That country then becomes their “domicile of choice”.  

Tax law is one of the areas that use the concept of domicile. The “non-dom tax regime” is most commonly used as a shorthand to describe the remittance basis of taxation, a set of income tax and capital gains tax rules only available to those who are resident but not domiciled in the UK (“RNDs”).  

Domicile also affects inheritance tax. Individuals domiciled in the UK pay inheritance tax on their worldwide assets, whereas those domiciled outside the UK are only subject to inheritance tax on their UK assets.  There is a “deemed domicile” rule for inheritance tax: individuals who are UK resident in 17 out of 20 tax years are treated as UK domiciled for these purposes only.

The remittance basis
The default position for UK residents is that they pay UK tax on the arising basis, meaning that their worldwide income and capital gains are subject to UK tax.  

An RND is taxed on the arising basis but can choose to be taxed on the remittance basis instead.  Under this regime, the RND will be liable to UK tax on:

-- Income and capital gains that come from the UK (e.g. salary from a UK job and profits from the sale of UK property);
-- Income and capital gains that come from outside the UK that they enjoy in the UK.  These are referred to as “remitted”.

If they claim the remittance basis, the RNDs are not liable to pay UK income and capital gains tax on non-UK income and gains that they do not remit to the UK.    

After seven years’ residence in the UK, resident non-doms must pay a charge (in addition to any tax due) to use the remittance basis.  The charge ranges from £30,000 ($45,532) to £90,000 per year, depending upon how long the RND has been resident.

Will there be a replacement for the remittance basis if it is abolished? No one knows.  The Labour Party has said it would consult on the detail of new rules for temporary residents but we have no more detail at present.

We assume that personal taxation would be based on residence only.  A system based on nationality is very unlikely.  The removal of the link between domicile status and tax would also potentially take large numbers of UK expats out of inheritance tax and there would need to be serious consideration of this and similar consequences that appear to have been overlooked so far.

Is there a problem with the remittance basis? There has been a large amount of sometimes confused and ill-informed comment about the remittance basis but it boils down to some key points, some of which are, in our opinion, cogent and others that are not. Here are some examples:

-- The rules are a “set of loopholes”
They are not. Tax loopholes are ways of minimising tax that are inadvertently created by legislators or draftsmen. The remittance rules have been deliberately created and preserved by Parliament.  

-- The rules are used by those they are not designed for
It appears to be accepted that, even on the current rules, the remittance basis should be available to those who are from outside the UK and intend to be in the UK for a limited period.

-- Critics of the current system say that it is used by “those who by any normal standards are British”
In our view and experience, this is possible but not common and is at least partially due to handling by HMRC. Lately, there has been particular tenacity in refusing to accept claims to non-UK domicile by Britons who move abroad permanently.  This cuts both ways: if it is difficult for an Englishman to lose his UK domicile, then it must be equally difficult for an Australian to lose his Australian domicile if he lives in the UK.

A second allegation is that it is possible for a person with an English domicile to live outside the UK for a while, claim non-UK domicile and then move back to the UK and use the remittance basis for years.  In our experience, this is virtually impossible.

In our view, the fact that domicile has become so difficult to change has thrown up some unsatisfactory situations. These could be resolved by setting the length of time for which the remittance basis could be claimed after starting UK residence.  We suggest the same deemed domicile rule, which applies for inheritance tax.  To avoid possible retrospective effects, the rule should apply to those becoming UK resident after a future date or allow a suitable transition period.

-- The existence of separate sets of rules for different types of UK resident is unfair or immoral
The question of whether tax law has a moral aspect is a quagmire in which better people than us have drowned, but in the context of the remittance basis, the views seem to boil down to:

-- The existence of the remittance basis attracts wealth producers and contributes a large amount to the UK economy by way of tax and economic activity, which means that UK taxpayers need to contribute less or can receive more.  That makes it beneficial and worth preserving even if it is inconsistent;
-- The existence of the remittance basis means that not everyone is playing by the same rules, which is iniquitous.  All UK residents should be subject to the same rules and foreigners who want to come to live in the UK must accept that this is the cost of doing so;
-- The remittance basis costs the UK money instead of making it and should be abolished purely on those grounds.

-- The remittance basis costs the UK “hundreds of millions of pounds”
There is much disagreement about this. We cannot say whether the various statistics that are bandied about are true but we can only comment based on our experience.  
In our view, the remittance basis does not cost the UK money but makes a lot of it. The cost of claiming the remittance basis for a person who has been resident in the UK for at least seven tax years is up to £90,000 per year.  In 2012-13 (when the limit was £30,000), this group comprised 5,100 people who paid a total of £226 million to the public purse in order to pay tax on the remittance basis.

This does not include the UK tax they paid on their UK income and gains and remittances to the UK or other taxes they pay in the UK such as VAT and SDLT.  It is a fundamental misconception that the fee paid for the privilege of claiming the remittance basis represents the total tax bill paid by that individual in the UK for any given tax year.

If the remittance basis is abolished, RNDs who currently pay to use the remittance basis would not start paying UK tax on the whole of their worldwide income and capital gains.  By definition, such RNDs have significant interests in other countries that impose their own tax.  

This would either prevent UK tax being payable or significantly reduce the amount that the UK would receive if the remittance basis was abolished.  Some tax would become payable but it should not be assumed that it would simply be equal to a proportion of the global earnings of those who currently use the remittance basis.

The UK benefits from opening up its economy to outside investors.  The availability of the remittance basis of taxation has been a significant draw.   In our view, it is unlikely that there would be an exodus of RNDs immediately if the remittance basis was withdrawn but there would be a gradual drift away.  What is more worrying is that those who would previously have considered the UK as a place to live, and would have benefited the UK economy, will turn away, taking their business and taxes to a jurisdiction that wants them.

-- No one else has a system like the UK’s
All countries’ tax systems are different: France has a wealth tax, the UK does not; New Zealand has no inheritance tax, the UK does.  International comparisons of tax systems are not particularly helpful.

-- Does the UK need a favourable tax regime for any of its residents?
The abolition of the remittance basis would probably lead to a discussion of whether it is desirable to compete for internationally mobile individuals and if it is, what incentives should be offered to them.  

-- The fact that there are more billionaires living in New York than London, despite the fact that the US taxes residents on their worldwide income, has been cited to show that tax incentives like the remittance basis are not required.
There are differences: the US is the largest economy in the world and represents around 22 per cent of global GDP. Within the US, there is also huge competition amongst states for economically attractive residents.  The UK represents around 3.7 per cent of global GDP.  It is part of the EU and its borders are porous. It competes, as a global financial hub, with Dubai, Singapore and Hong Kong, none of which tax an individual’s offshore investment income.  Closer to home, the financial hubs in the EEA either offer an incentive for temporary residents, i.e. Belgium, Holland and Switzerland, or are largely focussed on the domestic market i.e. Paris and Frankfurt.

So what should be done?
The remittance basis is an incentive to attract wealthy individuals. The fact that it has sometimes been misused and is not a universally accepted method of levying tax should not automatically lead to its demise. What the last 10 years has shown is that there has not been a coherent strategy of reforms of UK personal tax nor a stated goal.  Instead, there has been a drip feeding of new rules, with the occasional forced backtracking, to see if revenue can be raised and votes won.  This sends mixed messages about the UK’s tax and political system and can occasionally create very sharp edges.  

What we would welcome is a genuine discussion of how to reform the UK’s over-complex tax system, which creates genuine loopholes that do actually lose the UK hundreds of millions of pounds.  We suggest that the goal should be to create a stable and clear set of rules that are fit for a UK that is open to the internationally mobile individual and global business, and is an active and important part of a growing global economy.