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UK's Non-Dom System Is Doomed, But Replacement System May Have Silver Lining – Lawyer

Tom Burroughes

12 April 2024

The UK government is abolishing the resident non-domicile system, switching to a temporary residency programme. Separately, the Labour Party, the official opposition that is far ahead of the Conservatie Party in opinion polls, wants to tighten rules further on non-doms who might be trying to mitigate the fallout.

Although the new, proposed four-year temporary residency model might appear an austere replacement, it could attract capital into the country rather than repel it overall, a lawyer argues. 

A person will be eligible if he or she has lived abroad for at least 10 years, and they can qualify for this status for a period of four years. 

“For people moving to the UK, if they have been a non-UK resident for at least 10 years, they get four years to benefit from a new system; they can bring non-UK wealth into the country (income, and capital) and not pay UK tax on this. (UK-sourced income/wealth is taxed). Under the old remittance basis system for non-doms, money that was brought into the UK was immediately taxed,” Kyra Motley, private client and tax law partner, , told this publication.

“It is simpler to understand and easier to compete with other countries that have temporary residency regimes. You can bring that capital into the UK, for example, and not pay tax on it,” Motley continued.

“We could end up with people moving to the UK as a result of these changes,” she said. 

While there are problems – much depends on what a future government might do in terms of tax – the temporary residency system might bring benefits, she said.

There are two categories of persons particularly who are affected by the temporary residence proposition. First, there are entrepreneurs who have lived abroad for at least a decade, wanting to bring their capital/wealth into the UK, and expats who have been abroad for 10 years, wanting to return. In the second case, for example, if a businessman/woman from the US were to come to the UK, they would only pay tax on UK-based wealth, not the wealth brought from the States.

“It is designed for people passing through. For example, a person in 2035 could come to the UK and sell their overseas business. They could then bring the funds into the UK without any UK taxation within a four-year period (therefore until 2039),” Motley said.

For expats, people such as those who have gone to Dubai could, if they stay there for 10 years, bring their wealth back to the UK if they relocate, and it is tax free for four years.

There has been a steady drumbeat of calls for the non-dom system to be abolished or reformed. (See here and here for recent conversations about the issues.) One standard complaint is that the regime is unfair because it enables a small number of people to shield worldwide wealth from domestic UK tax authorities' reach, while the broad mass of the public don't have that advantage. Complaints about the wealth of the so-called "one per cent" play into resentment about supposedly favourable treatment of people who are non-doms.

Defenders of the non-dom system argue that money created outside the UK should be taxed where it was originally made, and that the UK doesn't have - unlike the US - a worldwide tax code, and that non-doms bring in more revenues, in net terms, overall. A worry is that if many non-doms quit the UK, and others decline to live in it, it will cut, rather than raise, revenues in the medium term. This means more of the overall tax burden will be carried by the broader public.

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. (The editor of this news service has reviewed a book that challenges much of this supply-side reasoning.)

IHT problem
A complication is inheritance tax, however. If, in 2025, a person came to the UK, then that person’s total estate, foreign and domestic, would be  proposed to be in scope of the tax 10 years’ later. However, if a person dies before the end-date period of this tax-exempt period, HMRC would only tax the UK-based wealth of a deceased person; they are in no position to tax what is abroad, and it is likely that the tax authority have no-one to contact to establish whether that overseas wealth is correctly disclosed and the right amount of tax paid. 

WealthBriefing asked about shadow chancellor Rachel Reeves’ proposed changes to IHT for the purpose of the non-dom situation and the ability to settle trusts. 

From Motley’s understanding, a Labour government would remove the excluded property status of trusts.

Reeves said a Labour administration would scrap a proposed 50 per cent discount on the income tax non-doms would have to pay in the first year of the new rules operating. The politician said all foreign assets held in offshore trusts would also be subject to UK inheritance tax. The government has said that those held in a trust set up before April 2025 would be excluded from inheritance tax permanently. 

Reeves’ intentions for these structures remain unclear, although it is perhaps unsurprising at this stage of the parliamentary calendar, Motley said.

“We definitely do need to have certainty in the legal system,” she said. 

Asked if all these changes would lead to a simpler system, she said it is unlikely; there is still considerable complexity, hence a need for advice.