Political football and non-doms
12 May 2023
In the lead up to the March 2023 budget there was speculation as to whether any changes may be introduced to the taxation of non-domiciliaries, known as the remittance basis. In this article we will review the current state of the remittance basis and the approaches of the main political parties to the subject. Finally, we will dust off the Birketts’ crystal ball and predict what the future will hold for remittance basis users.
What is the remittance basis – a little history
The remittance basis rules can be traced back almost 225 years to the Combination Act 1799, which provided that UK residents were only taxed on overseas income to the extent that it was received in the UK. It was not until 1914 that this basis of taxation was restricted to those who are resident but not domiciled in the UK. The rules have been tweaked and updated significantly since then, but the underlying principle remains unchanged. If you are resident but not domiciled in the UK, you can elect to be taxed on the remittance basis. In doing so, you will only be subject to UK Income Tax and Capital Gains Tax on foreign income and gains that are remitted to the UK, with other foreign income and gains avoiding UK tax.
For the first seven years of residence there is no charge for non-domiciliaries to use the remittance basis. However, since 2008 a “remittance basis charge” of £30,000 is imposed on individuals who have been resident in the UK for at least seven of the previous nine tax years. This charge increases to £60,000 per year once you have been resident for 12 out of the previous 14 tax years. This charge was introduced in 2008 with the £60,000 charge having been increased from £50,000 in 2015.
Lies, damned lies and statistics
The remittance basis rules are an attempt to balance two competing political goals, those of encouraging overseas individuals to move to and invest in the UK whilst at the same time maximising the tax take from them. Perhaps equally important is the requirement not to be seen by the voting public as providing unfair “tax loopholes” to wealthy foreigners.
So, how has this worked out in practice? An indication can be gleaned from HMRC’s published statistics on the use of the remittance basis. Figures are available for the tax year ending 5 April 2021 and they make for interesting reading.
In the 2020/2021 tax year there were approximately 68,300 non-domiciled individuals in the UK. Of those, around two thirds elected to be taxed on the remittance basis, paying an average of £143k each in Income Tax, CGT and NICs each. In addition, a further £1bn was paid by those liable to pay the remittance basis charge. Remittance basis users therefore contribute a significant amount to public finances, but this has not stopped them from coming under intense scrutiny.
Which way are the political winds blowing?
Non-doms occasionally enter the media spotlight, and rarely in a positive way. Previously amongst those 68,300 individuals claiming the remittance basis was Akshata Murty, the wife of Rishi Sunak. If the headlines are to be believed, the benefit she received from claiming the remittance basis could be in the region of £20m. Unsurprisingly, this story was jumped on by the opposition parties who held it out as an example of the unfairness of the UK tax system and of the favour given by the Conservative Party to wealthy overseas individuals.
The Labour Party has commented on this issue previously, with its 2015 General Election manifesto including a commitment to “abolish non-dom status so that all those who make the UK their home pay tax in the same way as the rest of us”. A similar statement was made by Rachel Reeves, the Shadow Chancellor, at the time the story about Ms Murty broke. However, this was then watered down by a suggestion that the remittance basis would be replaced with a short-term scheme which could be used for up to five years.
The Liberal Democrats have made no recent policy announcements on this topic, with the best indicator of their views being found in the 2015 manifesto. Here they advocated for an increase in the “remittance basis charge” to £60,000 after seven years’ residence, and £100,000 after 12 years’ residence. They too, it seems, were of the view that the existing rules are too generous.
The proposal to abolish the remittance basis received support from research carried out by LSE and the University of Warwick. This concluded that abolishing the remittance basis would not result in a significant number of non-domiciliaries leaving the United Kingdom, and would instead increase tax revenue by £3.16bn per year. The research is not without its critics, with some pointing to the weakness of the methodology used, which was primarily a comparison with the impacts of less drastic reforms that took place in 2017.
At the time this article was written, Labour is enjoying a lead in the polls of between 10% and 15%, with just over a year and a half to go until the next general election. Should Labour win, it is a reasonably safe bet that reforms will take place. However, it is likely that the realities of governance would prevent an outright abolition of the remittance basis. In our view, it is more likely that the length of time during which the remittance basis can be used will be reduced.
Before then, the Conservatives may look to amend the remittance basis in a similar way themselves as a way of buying public support, and we had suspected that this might take place in last month’s budget. Perhaps the reason that no reforms have been suggested so far is that proposals will be announced when election season is in full swing towards the end of next year for increased political clout. Either way, it would be a risky bet to take that the rules will remain as they are for the long-term, and the International Team at Birketts is on hand to help non-doms review their affairs and plan ahead.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2023.