Non-dom reforms could be 'tipping point' for wealthy foreigners

Labour's pledge to reform non-domicile rules promises to significantly alter the tax equation for wealthy foreign residents and will prompt many to re-evaluate their options, experts have warned.

Ed Miliband's announcement this week to abolish a regime that allows "non-doms" to exempt their offshore earnings from UK tax.

The non-dom regime dates back at least a century, but the amount of tax levied on wealthy foreigners has risen steeply since 2008, when an annual charge was levied on longer-term residents wishing to shield their non-UK income from HM Revenue & Customs.

Wealth managers, lawyers and accountants have expressed concern that many non-doms will move to more favourable tax jurisdictions such as Switzerland, Monaco, Singapore or Hong Kong.

The proposals, combined with others such as Labour's "mansion tax" that would target owners of expensive properties, have not gone unnoticed by rich foreigners, said James Hender, head of private wealth at Saffery Champness.

"We are approaching a tipping point where wealthy international clients are feeling unwelcome here."

Nimesh Shah, a partner at accountants Blick Rothenberg, said that because wealthy foreign individuals are by their nature internationally mobile, the removal of their privileged tax status could easily prompt large numbers to depart.

"If the cost of remaining UK resident runs into millions of pounds a year, the decision for them to leave becomes easy," said Piers Master, a partner at law firm Charles Russell Speechlys.

But for many non-doms, especially those who have lived in the UK for decades, moving country to save tax is unlikely to be a priority, said George Bull, senior tax partner at accountants Baker Tilly.

And leaving is not their only option. Those who lose their non-dom status but wish to remain in the UK could seek to avoid paying UK income taxes by making sure they comply with the "statutory residence" test, said Mr Bull.

"It may be the case that hyper-wealthy business owners and non-earners simply pay attention to their diaries."

However, being non-resident for tax purposes is about more than the number of days spent in the UK. Since 2013, HMRC has taken into account a number of "tie tests" to determine tax residency. These include not only the time an individual spends in the UK in any given tax year, but also his or her other connections - such as owning property and having children in a UK school or university.

Those who wish to stay in the UK but do not comply with the non-residence criteria would not necessarily be liable for full UK tax on their global earnings, as treaties prevent double taxation.

The latest official figures show there were 110,700 people who claimed non-dom status in the UK in 2012-13. According to HMRC, they paid an estimated £6.2bn in income tax that year.

Domicile is based on the notion of "home country". An individual's domicile is usually the country of their father's permanent residence when they were born, although there must be links that indicate intent to return if they are not currently resident there.

Non-doms can choose whether to pay UK tax on their worldwide income - on what is known as the "arising" basis - or pay an annual charge so that tax is liable only on their UK income and money brought into the country. The latter is known as the "remittance" basis.

Roughly three-in-five non-doms already pay UK tax on their global earnings. In most cases, this will be cheaper than paying the remittance charge, which starts at £30,000 a year and rises to £90,000 for longer-term residents.

Under the current regime, only those who have been living in the UK for at least seven of the past nine years have to pay the annual levy to exempt their overseas income, however. In 2012-13, the number who paid the remittance charge was only 5,000.

While the Labour leader pledged that "real" temporary residents would only be liable for tax on their UK earnings, Ed Balls, the shadow chancellor, has suggested that it could be as little as two years.

A large proportion of non-doms who have not been in the UK long enough to pay the remittance charge - a total of 41,700 in 2012-13 - are likely to be affected, depending on where the threshold is set, said Mr Master. "There would many asking themselves whether they like the UK enough to become tax residents."

Mr Shah said that even if the non-dom regime were abolished, there would remain statutory income tax relief for foreign residents who lived in the UK for less than three consecutive years.

Under Overseas Workday Relief, overseas earnings that are not remitted from abroad are not liable for UK income tax.

"This relief would potentially have to be revisited under Labour's proposals," said Mr Hender.

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