The polls show that Labour are likely to form the next UK Government. For individuals claiming the remittance basis of taxation in the UK that brings uncertainty as Labour want to abolish the non-domicile (“non-dom”) regime.
What is the remittance basis of taxation?
Ordinarily, individuals who are tax resident in the UK are taxable on their worldwide income and gains as they arise. However, individuals who are domiciled outside of the UK are able to benefit from the remittance basis of taxation.
Under the remittance basis of taxation, individuals are subject to UK tax on their UK sourced income and gains as they arise but their liability to tax on non-UK sourced income and gains is limited to the amounts that are remitted to (broadly speaking, transferred to, used or enjoyed in) the UK.
One of the consequences of claiming the remittance basis is the loss of the personal income tax allowance and annual capital gains tax exemption for the year.
Generally, for the first seven years of UK tax residence the remittance basis of taxation can be accessed without paying the Remittance Basis Charge (“RBC”). The RBC is currently £30,000 per annum for individuals who have been UK tax resident for 7 out of the previous 9 tax years, increasing to £60,000 per annum for individuals who have been UK tax resident for 12 out of the previous 14 tax years.
Non-domiciled individuals who have been tax resident for 15 out of the previous 20 tax years are deemed-domiciled in the UK for all taxes and cannot, therefore, access the remittance basis of taxation.
Domicile and Inheritance Tax
Inheritance Tax (“IHT”) is levied in accordance with an asset’s situs and a person’s domicile status. Individuals that are domiciled or deemed-domiciled in the UK are subject to UK IHT on their worldwide assets. Individuals that are neither domiciled nor deemed-domiciled in the UK are subject to UK IHT on their UK situs assets only.
We have not received any detail on the proposed changes to the non-domicile regime under a Labour Government, but it is well documented that the total abolition of the scheme is unlikely to generate the additional revenue that Labour suggests.
Firstly, a number of remittance basis users are economic tourists and have no meaningful ties to the UK. There are numerous jurisdictions with geographic proximity that offer tax efficient regimes for foreign nationals (notable examples being Portugal, Italy and Switzerland), and Labour appear to be discounting the threat that individuals will seek to emigrate rather than remain in the UK under a less favourable tax regime.
Secondly, for those that will stay in the UK, it is not always the case that the tax payable on the offshore income and gains exceeds the RBC. When accounting for the extensive Double Tax Agreements that the UK has with other jurisdictions and the fact that some taxpayers claim the remittance basis for a mixture of confidentiality and convenience, the actual tax payable may not be that lucrative. For example, the RBC of £60,000 equates to worldwide income of £133,333 (without tax credits) for an additional rate taxpayer.
In reality, the non-domicile regime goes further than the rules outlined above and there is no denying that the UK needs to remain attractive to internationally mobile individuals. Therefore, without extensive consultation and a legislation re-write, there is unlikely to be anything too dramatic within the first years of a Keir Starmer premiership.
That being said, there are some simple changes that could be made to the non-dom regime without triggering an exodus from the UK while appeasing the general public. These include:
1. A reduction of the number of years that a person can be resident before paying the RBC – could we see this decrease to 5 out of 10 previous tax years, for example? This would mean a 6 tax-year gap would be needed to reset the remittance basis clock. This would fall in line with the deemed-domicile and temporary non-resident rules.
2. An increase in the RBC.
What should you be doing?
At this moment in time there is no certainty on the future of the non-dom regime. We suspect to see some relatively minor changes come into effect from April 2025, with potentially more dramatic changes in the following years.
However, there are a number of things that non-domiciled individuals could consider doing. These include considering a potential future move away from the UK (which takes some inter-jurisdictional planning) or under-taking planning now in anticipation of the RBC coming into effect sooner than may have been anticipated previously.
If you would like to discuss any of the options available to you, including whether you should be implementing anything now, please contact Sian Armitage