What would a non-dom replacement tax regime look like?

This pledge refers to the tax regime that is designed to limit liability to UK tax on worldwide income and on gains for those individuals who qualify for non-dom status.

In September 2022, researchers published a paper that estimated that the abolition of the tax regime for non-doms would raise tax revenue of £3.2bn from 26,000 people.

An individual needs to be UK tax resident before they are subject to the default position of UK tax on their worldwide income and gains.

Since April 2013, determination of tax residence has become complicated but can be determined by a statutory residence test. Contrary to popular misconception, an individual can be tax resident even if they are not present in the UK on 183 days of a tax year. 

There is much to be said for the attractiveness of a stable UK tax system, and there are drawbacks to continued change.

The Labour party has suggested that post abolition of non-dom tax status, a replacement tax regime for people who are temporarily in the UK would be introduced. This is an acknowledgement that other countries provide tax incentives for some individuals to move their tax residence to their jurisdiction. 

But what should a replacement tax regime in the UK look like?

So far Labour has not volunteered any details. Any significant change would require consultation as part of a new tax regime’s development and implementation. 

Potential target of a reformed special tax regime 

The obvious starting point is in-bound expatriates. This group of people is wide and might include employees of global organisations in the financial services industry, clinicians in the NHS, established entrepreneurial businesses expanding to the UK, or innovative individuals investing in the UK. 

One common theme among this category of expatriates is that they will be earning income from work, either as employed or self-employed individuals.

With the increase of so-called digital nomads, there is an argument that a reformed tax regime must include people who choose to come to work in the UK and contribute to the economy. 

The period during which such a replacement regime would apply to a person is up for debate; the suspicion is that it would be around five years, which would be competitive with countries such as Spain which has special tax rules for in-bound expatriates.

However, the estimated tax revenue halves to £1.6bn if the existing remittance basis is kept for non-doms in a reformed regime that retains existing tax benefits for five years.

What types of tax incentives might apply?

A reformed tax regime could focus on having a reduced tax rate for the period during which it applies, whether that is for five years or less.

For instance, the current top rate of income tax for those earning more than £125,140 from employment is 45 per cent (ignoring national insurance contributions).

A reformed special tax regime could give a reduced top rate of income tax of, say, 25 per cent on any non-UK income for the first five tax years of moving to the UK.

This would be on the basis that such income is remitted to the UK, otherwise the ordinary top rate of income tax of 45 per cent would apply. While this may still be considered unfair when compared to taxpayers permanently resident here, if the intent is to encourage migration by specific individuals for a limited period to plug gaps in the economy, this concession might be thought an acceptable outcome.

Much has been said about the potential emigration response of non-doms if the existing tax regime is abolished.

This proposal would limit the tax break to non-UK source income; often such income is taxed in its source country anyway, for example dividend income from shares.

Another key area where the existing non-dom regime mitigates undesirable tax outcomes for those moving to the UK is where such people own non-UK assets that have unrealised capital gains.

Such unrealised gains would be on assets that have increased in value significantly since they were first acquired but are not sold until their owners move to the UK.

At the moment, there is no UK tax due on disposals of such assets if the individual is taxed under the non-dom regime and they do not remit the gains to the UK.

If the non-dom regime is abolished, sale of such assets when the person is UK resident would mean tax to pay on gains that accrued years before their owners came to live here.

This stings more because there is no allowance for stripping out the effect of inflation in taxing such gains.

A reformed regime could seek to only tax any gains on non-UK assets that have accrued over the period in which the individuals have lived here. 

Non-doms already in the UK

Much has been said about the potential emigration response of non-doms if the existing preferential UK tax regime is abolished.

In most conversations about what the abolition of the non-dom regime might mean for tax collection and inward investment in the UK, it is acknowledged that non-doms can simply leave to avoid an unfavourable change in tax policy. 

It is a truism that the tax base needs to be broad to raise significant sums of revenue for the exchequer.

With a smaller tax base, should large numbers of the estimated 26,000 non-doms choose to leave the UK rather than pay the estimated £3.2bn extra tax resulting from abolition of the existing non-dom tax regime, the net loss in tax revenue would be significant.

There have been many changes to the non-dom tax regime in the past two decades, first by a Labour government in 2008 and subsequently by a Conservative government in 2017.

There is much to be said for the attractiveness of a stable UK tax system, and there are drawbacks to continued change.

As Heraclitus said, there is nothing permanent except change. One thing is certain, non-doms are by their nature financially astute and internationally mobile; they do not have to live here.

If they are 'squeezed until the pips squeak' they can always take a taxi to Heathrow.

Joseph Adunse is a tax director at Moore Kingston Smith