As the UK prepares to say goodbye to the non-dom system – and possibly many using that status as they head abroad – a law firm argues that a proposed replacement system is at odds with immigration policy.

The proposed end of the UK’s resident non-domicile (“non-dom”) system – a policy of both the Conservative and Labour parties – clashes with immigration policy, according to law firm Fragomen.

The immigration law firm weighed on a topic which, while it affects a few thousand people directly, has become a signature policy of politicians trying to push against what they claim are unfair tax perks for foreign-born HNW people. 

The UK is now in election mode, with polling due on 4 July. Labour retains a double-digit opinion poll lead, signalling a large majority in the House of Commons.

The Labour Party issued its election manifesto yesterday, reiterating its desire to end the non-dom system and include inheritance tax into any part of the equation, as well as change how private equity firms' earnings are taxed. The Conservative Party also issued its manifesto this week.

[Conservative] Chancellor of the Exchequer Jeremy Hunt in March said – in a move seen as stealing the Labour Party’s thunder – he would move to end a system dating back to 1799. Instead, he said he will bring in a temporary residency system in which people can bring foreign investment and gains into the UK tax-free for four years if they’ve lived outside the country for at least 10 years. 

“The changes proposed by both political parties are leaving foreign investors grappling with the implications of their relocation plans, highlighting a significant misalignment of immigration and tax legislation,” Olga Nechita, a director at Fragomen, said in a recent note.

“Foreign investors need to have lived in the UK for five years to be eligible to settle and a further 12 months to apply for British citizenship – a timeframe that does not tally with the four-year window under the proposed FIG [foreign income and gains] regime,” she said.

“The attractiveness of the UK for high value and highly mobile investors is being increasingly questioned, and that should worry UK politicians across all political parties. This misalignment of tax and immigration rules will only raise further questions and concerns and possibly deter foreign nationals from considering the UK as a destination of choice,” the lawyer continued. 

“Conversations with clients have underscored the need for agility in navigating the evolving landscape. As the UK undergoes these profound shifts in election dynamics, foreign nationals are urged to recalibrate their strategies to adapt to the evolving landscape,” Nechita added.

One element of the debate relates to what is sometimes called "supply-side" economics – the idea that raising tax rates beyond a certain point reduces rather than increases revenues. In a world without exchange and capital controls, where money is mobile, high taxes on HNW individuals can backfire, on this argument.

Inheritance tax
As already noted by this news service, inheritance tax bills may be a decisive factor pushing non-doms to quit the UK. 

In its manifesto yesterday, the Labour Party said: “We will end use of offshore trusts to avoid IHT so that everyone who makes their home here in the UK pays their taxes here.” For some non-doms, this is a deal-breaker, lawyers have told WealthBriefing.

At issue is whether – because a number of other European countries have regimes resembling non-dom systems (Italy, Ireland and Greece, for example) – there will be an exodus of HNW individuals, leading to a net loss of revenue to the UK Treasury, rather than a hoped-for gain, advisors fear.

Not everyone is sceptical about the proposed new temporary residency system, as shown by this story.

On a separate topic, the Labour Party’s manifesto said that if elected, it would close the “loophole” of enabling performance-related pay to be treated as a capital gain.