The losses for the Conservative government in the Wakefield and Tiverton and Honiton by-elections increase the chances of a Labour government – or a Labour-led coalition – after the next general election.
What might this mean for the tax status of those UK residents who are domiciled elsewhere – ‘non-doms’ in colloquial terms?, writes Gerry Brown, trust and estate planning specialist at QB Partners.
The Labour shadow chancellor Rachel Reeves has previously said: “If you make Britain your home, you should be paying your taxes here, which is why we would abolish the non-dom status to ensure that that actually happens.”
A Labour party press release added that the party wanted to “abolish non-dom status, and introduce a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent”.
“This would put an end to the broken 200-year-old system that lets people dodge millions in tax, and bring our rules into line with those of systems similar to other major economies like France, Germany and Canada.”
Other countries’ rules
It is not clear that Labour’s comparison of the UK’s tax system with those applying in France, Germany and Canada is particularly useful. Domicile, in our UK understanding of that concept, does n0t play a significant role in these countries’ tax regimes.
An individual who becomes a Canadian resident – usually because they have been present there for 183 days or more in a calendar year – gets an uplift to market value in determining the capital gains tax base cost of an asset. This restricts subsequent capital gains to the period of Canadian residence.
Until recently, a new immigrant could establish a non-resident trust which would be tax exempt until the settlor had been resident for 5 years. This strategy is no longer available.
Israel offers new residents or newly-returned residents a 10-year exemption from tax paying on foreign-source income. This is extended by providing a similar 10-year exemption on capital gains from the disposal of assets located abroad. The exemption even extends to assets located abroad acquired after becoming Israeli resident.
The UK situation
In comparison with other countries, the UK’s deemed domicile rules seem generous. The immigrant to the UK can stay here for 15 years before becoming domiciled – though the rules are stricter for immigrants who were previously UK domiciled and ‘lost’ that status.
The argument for the status quo is that the UK’s ‘friendly’ regime will attract wealthy internationally mobile individuals to live in the UK and contribute to the UK economy in a myriad of ways. These individuals, it is argued, will still pay UK taxes such as council tax excise duties and VAT.
Imposing additional tax charges will drive these individuals to move to other countries thus damaging the UK economy. Similar arguments were deployed when the remittance basis charge was introduced in 2008 but there was no significant emigration as a consequence of the changes.
So what could Labour do?
A reduction in the ‘deemed domicile’ qualification period seems inevitable – perhaps to as little as five years. A change to the inheritance treatment of ‘excluded property’ trusts so that the reservation of benefit rules apply to these arrangements?
Advisers with clients potentially impacted should be developing strategies well in advance of any changes.
This article was written for International Adviser by Gerry Brown, trust and estate planning specialist at QB Partners.