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What are we to make of the UK 2015 Election for the non-dom rules?

15 May 2015

The battle of Bannockburn was a landmark battle in the First Scottish War of Independence. In 1314, the clan Cameron fought amongst the victors for an independent Scottish nation.

On 7 May 2015, the Prime Minster, David Cameron declared: 

“I want my party – and I hope a government I would like to lead – to reclaim a mantle that we should never have lost: the mantle of One Nation, one United Kingdom.”

The Conservatives won the 2015 UK General Election with an outright majority: 51% of the seats from 37.8% of the vote.  Parliament will open on 27 May and there is then the prospect of a new budget on 8 July.

Non-doms – the story so far

So what are the ‘non-doms’ to make of the election campaign and the result?  What will those who are or have been thinking of coming to England, Wales, Scotland or Northern Ireland to live here for some time, but not indefinitely, do?

Up to 150,000 non-doms pay tax on foreign income and gains on the remittance basis.  Each year around 6,000 remittance basis users (RBUs) choose to pay the Remittance Basis Charge (RBC) to retain access to the remittance basis of taxation as long-term residents.  

On 22 January 2015 H.M. Treasury published a consultation paper on whether to make the election to pay the RBC apply for a minimum of 3 years. In "Ensuring a fair contribution from non-UK domiciled individuals: consultation on a minimum claim period for the remittance basis charge" the foreword starts with this observation:  

“We recognise the significant contribution that non-UK domiciled individuals make in the UK, creating jobs and inward investment. That is why we stand firmly behind the remittance basis of taxation, which is a unique way of taxing people. With the changes announced at Autumn Statement 2014, the UK will continue to offer a very competitive tax regime, allowing people who are not domiciled here to base themselves in the UK for a long time whilst maintaining a different tax status.”

On 26 March the Finance Act 2015 increased the RBC paid by non-doms who have been resident in the UK for more than 12 of the past 14 years from £50,000 to £60,000.  The Act also introduced a new charge of £90,000 for people who have been resident in the UK for more than 17 of the past 20 years. The £30,000 charge remains the same for those who have been resident in the UK for 7 of the past 9 years.  These changes came into force  from the 2015/16 tax year. 

On 1 March the Financial Times put the Government to proof.  In an editorial headed "The Madness of King George III’s non-dom tax system" the Leader said:

“Britain should sweep away the archaism that allows people to claim a domicile that differs from nationality or residence.”

On 8 April the Labour Leader, Ed Milliband vowed to end the system:

“The next Labour government will abolish the non-dom rule. And we will replace it with a clear principle: anyone permanently resident in the UK will pay tax in the same way. The rules we will introduce are modelled on what other countries already do. Real temporary residents, here for a limited period, will only have to pay tax on what they earn here because they will be paying their taxes in their place of permanent residence.”

On 9 April the Conservatives answered back.  The Times, under the banner "Tories retaliate with plan to stop rich inheriting non-dom status" reported that the Chancellor of the Exchequer, George Osborne was examining a move to take away from children the ability to inherit their non-dom status, that is to say the rules that determine an adult’s domicile of origin and a child’s domicile of dependency:

“Rules that allow the rich to pass down their non-dom status to their children are regarded as the hardest to justify.”

On 13 and 14 April the Labour party and Conservative party respectively published their election manifestos.  The Labour Party Manifesto 2015 said:

“We will 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.”

The Conservative Party Manifesto 2015 followed.

“We will increase the annual tax charges paid by those with non-domiciled status, ensuring that they make a fair contribution to reducing the deficit, and continue to tackle abuses of this status.”

Have we been here before?

The call for reform of the law of domicile is not a recent development.   In 1987 The Law Commission and The Scottish Law Commission produced a joint report on the domicile rules.  While pointing out that no clear case had been put to them for abandoning the use of domicile in the context of taxation, the Law Commissioners recommended changes and included a draft Bill to give effect to them.  If the bill had been enacted then:  

  1. The normal civil standard of proof on a balance of probabilities would apply in all disputes about domicile.
  2. To establish the necessary intention for the acquisition of a new domicile by an adult it would be sufficient to show that he intended to settle in the country in question for an indefinite period.
  3. The domicile of a child, that is a person under the age of 16 would be the country with which he is for the time being most closely connected.
  4. There would be a presumption, unless the contrary is shown, that the child is most closely connected with the country in which the parent with whom he has his home is domiciled.
  5. The domicile of a child at birth would be determined in accordance with this rule and, accordingly, the domicile of origin, as a separate type of domicile, would have disappeared from the laws of the UK.

Some of the comments received on consultation expressed general concern about the effects of any change in the rules relating to domicile on the incidence of taxation.   The Law Commissioners acknowledged that any prospect of change in the law of domicile would cause anxieties and recommended that their proposals should come into effect some time after the bill was given Royal Assent in order to give tax payers and their advisers full opportunity to consider how changes in the law of domicile might affect their individual taxation circumstances.

What next?

While the sweeping changes promised by the Labour party may not now be on the cards, it seems inevitable that the Conservative Government will revisit the domicile rules.  Indeed, if the Queen’s Speech does not include mention of the non-dom rules in the government’s proposed legislative programme, at the opening of Parliament, proposals could be introduced in this or a later session of Parliament in the form of a Labour sponsored Private Members Bill.  The draft Bill published in 1987 runs to no more than three pages in length and consisted of just two clauses and a single schedule.  Any future changes may not only have income tax and capital gains tax implications but also potentially consequences for inheritance tax.

The most important thing for people who may be affected is to watch this space and take good advice!

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