Could abolishing tax benefits for non-domiciled individuals raise £3.2bn

29 November 2022

In these turbulent financial times, politicians of all stripes are scrambling to find ways to fund electoral promises. As an example, Labour’s shadow chancellor Rachel Reeves has proposed the abolition of the remittance basis of taxation for non-domiciled individuals (non-doms) to pay for increased numbers of doctors and nurses, as well as breakfast clubs for all primary school children, relying on figures taken from a report by Warwick University and the London School of Economics (LSE). But do the numbers add up?

The remittance basis

The remittance basis of taxation is a choice available to individuals whose ‘domicile’ (essentially their home country) is not the UK, who do not have a ‘domicile of origin’ (their domicile status inherited at birth from their parent) in the UK, and who have been UK tax resident for fewer than 15 of the previous 20 tax years. These individuals can elect not to be taxed in the UK on foreign income and gains so long as they are not ‘remitted’ to the UK. The claim can be made for free for the first seven years of UK residence, but after that an annual remittance basis charge (RBC) must be paid (£30,000 for those resident in at least seven of the previous nine tax years and £60,000 for those resident for at least 12 of the last 14 tax years).

The Warwick University/LSE paper suggests that abolishing the remittance basis would raise at least £3.2bn in additional tax revenues annually, and would lead to only around 77 non-doms leaving the UK.

Claiming the remittance basis

According to HMRC statistics, around 45,000 people claimed the remittance basis in 2020. In theory, all of these non-doms could be billionaires saving huge amounts of tax. If so, almost all of them stay in the UK for less than eight years because only 2,000 paid the RBC, a figure that has not moved much since 2013.

The more likely scenario is that most new arrivals claim the remittance basis not to save tax, but to avoid complexities such as having to report the same income in two jurisdictions and make claims for relief under double tax treaties. Once they have been UK resident for seven years, it costs less for most of them to pay UK tax on their worldwide income and gains than to pay the fixed RBC.

Checking the figures

This means that the majority of the tax saving identified by the Warwick/LSE study is likely to be concentrated in the hands of the 2,000 or so non doms who currently pay the RBC. On average, to raise, say, £2.5bn from this group, each person would need to receive annual offshore income of £2.8m, or make annual foreign capital gains of £6.25m.

Whilst some remittance basis users may have that amount of income and gains, it is a stretch to believe that most will. Anyone whose foreign income is more than £200,000 would save tax by paying the RBC, so it is likely that a good portion of the 2,000 long-term claimants of the remittance basis of taxation may have much more modest levels of wealth.

From the data available, it is not possible to prove that the Warwick/LSE model overstates the tax that could be raised by the abolition of the remittance basis. However, even a brief review of the figures calls them into question, and it seems likely that the actual tax savings involved could be much lower than suggested.

Leaving home

The authors of the Warwick/LSE study believe that only around 77 non-doms will leave the UK if the remittance basis were abolished, based on the fact that very few left the UK after the 2017 changes which introduced a maximum 15-year continuous period in which the remittance basis can be claimed.

Unfortunately, this ignores the context of the 2017 changes. These were accompanied by a series of reforms which allowed affected non-doms to reorganise their affairs in advance of the new rules taking effect. The overall effect of the 2017 changes was to allow non-doms to remain UK resident after losing the remittance basis without being taxed on foreign income and gains, provided that they restructured their wealth in the form approved by the legislation.

The Warwick/LSE proposals aim to raise large amounts of tax from a very small, wealthy and mobile group of individuals, but the outcome appears likely to be very different. It is easy for the extremely wealthy to live outside the UK, and to fly in and out to continue to enjoy the benefit of extended visits. Non-doms stayed in the UK in 2017 because their foreign wealth largely remained protected from UK tax. If that protection is removed, it should not be unexpected for many who are adversely affected to choose to leave, thereby paying no UK tax at all, spending less in the UK and damaging UK economic performance. 

Many other European countries have introduced policies to attract immigrants who have sufficient means not to be a burden on the state. Spain, Portugal, Italy, Malta, Ireland and Greece all have some form of non-domiciled taxation regime. Switzerland remains a popular destination precisely because it offers a lump sum taxation regime. More recently, a number of countries have introduced ‘digital nomad visas’ which are specifically designed to attract citizens of other countries who can support themselves, and some of those visas come with a privileged tax status as well. When other jurisdictions have recognised the value of having their own form of non-domiciled taxation regime, it seems curious for the UK to abolish the system that has been the basis other countries seem to wish to copy.

For more information, please get in touch with Andrew Robins or your usual RSM contact.