Axing non-dom status could lead to rich pickingsby
Shadow Chancellor of the Exchequer, Rachel Reeves, has non-doms in her sights. So if Labour wins the next election, this could be a mixed blessing for accountants.
Despite what was close to a landslide victory only a couple of years ago and confident predictions from the prime minister that he would be in power for a decade, the combined efforts of Messrs Johnson and Sunak mean that there is suddenly a realistic prospect of a Labour government coming to power in the foreseeable future.
If that comes to pass, we should all pay attention to yesterday’s proposal from Shadow Chancellor of the Exchequer, Rachel Reeves, who wants to abolish non-domicile status other than for temporary visitors.
She has been looking into the situation in other countries and initially suggests that the permissible period for non-residents to retain tax relief on income derived overseas should reduce to a period of between six months and five years.
From a practical perspective, one would hope that this might be tied to tax years, since the complications of trying to determine UK income for somebody who (say) arrived on 1 January 2024 and then became taxable on global income 12 months later do not bear thinking about.
Many readers might wishfully believe that this will never come to pass but that assumption would need to rely on either Boris Johnson or one of his relatively uninspiring colleagues winning the next general election (hardly a given at the moment), or on Labour concluding that the British economy really would be damaged by the proposed legislative change.
Life without non-doms
For decades, a view has been loudly propounded that the British economy would be severely damaged by the abolition of non-doms.
The theory is simple enough. If you took away the status, every non-dom would immediately leave the United Kingdom and relocate to a tax haven. In an interview with Reeves earlier in the week, it was suggested that many might decamp to Monaco or Jersey.
Let’s be realistic about this. Unless you particularly enjoy seclusion and sunshine, being ultra-rich in either of those locations would be a bit of a bummer. This would mean sacrificing every cultural interest, interactions with so many of your friends and, worst of all, the chance to follow the football team that you had just bought for several billion pounds.
In addition, given the current legislative framework where those who have been resident here for 15 years lose the status anyway, over a period of time many will be forced to make the same decision either way.
Dan Neidle of Clifford Chance, who has actively been campaigning for the change of late, says: “I’ve had numerous discussions with accountants, lawyers, QCs, consultants and business people. Lots of views, but three very consistent messages:
- There is zero support for the current domicile definition. As in, not one person supported it, and universal agreement we should replace it with, for example a simple statutory residence-based test.
- Few people now believe the traditional view that “if you change it they will leave”. The changes of the past few years demonstrate this ain’t so.
- There is no point reforming the non-dom rules without radical changes to trust taxation. Otherwise the wealthiest would be largely unaffected.
Food for thought.
As he suggests, while some might depart, others who are already used to paying taxes elsewhere, and realise that if they decamped to the United States the situation is going to be even worse, would stay and pay the taxes that they can easily afford anyway.
Now that this proposal is on the table and needs to be taken seriously, someone might start doing the calculations to determine the overall outcome.
If nothing else, it would certainly bring significant additional taxes into a very needy Exchequer at a time when the cost-of-living crisis is proving devastating.
In reality, the number of people involved is tiny but the consequences are significant. On one side, the tax flows would be very good news. On the other, some of the non-doms may decide to try their luck elsewhere.
Either way, there would be at least a short-term benefit to those accountants who advise the very wealthy. Just imagine how much you could charge for unpicking the arrangements and helping them to shift money overseas.
One hates to suggest it, but the less scrupulous of our brethren (and sorority) might even have a great deal of fun and bolster their bank accounts by facilitating the kind of tax evasion arrangements that have been so popular due to obfuscation and the willingness of those in crown dependencies and beyond to facilitate money laundering, fraud and other nefarious activities.
More realistically, those who dabble in this market would do well in the short term but might lose out when clients no longer needed sophisticated services to help them ensure that none of their income is taxable in the UK.
In return, having a very wealthy client who is fully taxable in the UK might not be the worst disaster, since they would need a great deal of advice to optimise their tax arrangements.