Do Labour’s plans to abolish the UK’s non-dom tax regime leave a £2bn tax black hole?

A lot of political noise has been made in recent months about the UK’s favourable tax regime for certain non-UK domiciled individuals (non-doms) and the possibility that, if elected, the Labour party is likely to abolish it. Labour has previously referred to a report published by Warwick University in September 2022, which concluded that abolishing the regime (or more precisely, the remittance basis of taxation that may apply to non-doms living in the UK) would raise an additional £3.2bn for the government in income tax and capital gains tax. To meet this target, policy changes would need to bring £7.1bn of overseas revenue into the UK tax net if all additional amounts were taxed at the highest UK income tax rate, £11.4bn if taxed at the highest capital gains tax rate, or more if taxed at lower rates.

Facts and figures

HMRC published its latest annual statistics on non-domiciled taxpayers on 6 July 2023. According to these figures, only 55,200 UK residents claimed to be non-UK domiciled in 2022, representing 0.08% of the UK population as estimated by the Office of National Statistics. Moreover, there has been a long-term downward trend in the number of non-doms claiming the remittance basis since 2017. Despite this, HMRC’s statistics report tax revenues of £12.4bn from self-assessment taxes alone in 2021/22 from non-domiciled and deemed domiciled taxpayers.

Only 37,000 of UK resident non-doms claimed to be taxed under the remittance basis in 2021, and just 2,100 paid the remittance basis charge (‘RBC’). A remittance basis user must pay an RBC for each tax year they claim it of either £30,000 or £60,000, depending on the number of years they have been UK resident during a relevant period, unless they have been resident for less than seven years of the previous nine tax years or they have less than £2,000 of overseas income and gains in the tax year. 

Of the 2,100 non-doms paying the RBC, 1,600 paid £30,000 and just 500 paid £60,000. An individual needs to have overseas income of at least £66,667 or capital gains of at least £107,143 to warrant paying the £30,000 charge. If they are liable to the £60,000 charge, they would need to have overseas income of at least £133,333 or gains of at least £214,286 for a claim to be worthwhile. It seems clear from HMRC’s statistics that the vast majority of non-doms resident in the UK do not generate significant income and gains overseas as they are not claiming the remittance basis, presumably because it is not beneficial for them to pay the relevant RBC.

What this means in practice

This tells us that Labour would be relying on a very small number of non-doms to pay significantly more in tax to make up the £3.2bn that it expects to raise from changing the rules related to non-doms. To give some context, if we focus on the 500 wealthiest non-doms, each of those would have to pay additional taxes of £6.4m on average, in order to generate the additional £3.2bn in taxes.

The Warwick University report assumes that few non-doms will leave the UK if the remittance basis is abolished; that may well be true, but those who do leave are more likely to be in this group of the 500 wealthiest, as they generally already have homes in other jurisdictions and, of course, have the most to lose by staying. And if they do stay, they still have the option to restructure their financial affairs to mitigate against paying tax on their worldwide income and gains.

To throw another spanner in the works, the Warwick University report also states that should the existing rules be maintained but limited to the first five years of an individual’s UK residence, the additional tax generated would be reduced by half to £1.6bn. Labour has already said that it would replace the current system with something more modern for a period of five years, and so the £1.6bn figure appears more realistic than the £3.2bn that has been quoted. 

Conceivable outcome

In summary, the government’s statistics show that very few people benefit in any meaningful way from the UK’s current non-dom tax regime and those that do are amongst the most wealthy, with the greatest ability to relocate outside the UK. As such, there are very good reasons to question whether abolishing the remittance basis is capable of generating the significant amounts of extra revenue the report suggests it could. Those looking to leave are spoilt for choice with Portugal, Italy and Spain being just a few of the nearby countries offering beneficial tax regimes to expatriates. With this in mind, the policy changes could result in much lower additional revenue being generated, perhaps closer to £1bn, which would appear to leave a £2bn black hole in Labour’s spending plans. 

For more information please get in touch with Rachel de Souza, or your usual RSM contact.