11 October 2022
The recent report by Warwick University draws some bold conclusions, most notably that the reforms suggested would raise at least £3.2bn annually and would lead to only 77 non-doms leaving the UK.
The £3.2bn tax figure is based on the abolition of the non-dom remittance basis. The remittance basis allows non-doms to pay no tax on foreign source income and gains, so long as the money is not brought to or used in the UK. Non-doms can currently claim the remittance basis for free for the first seven years of UK residence. They will then need to pay a fixed charge, known as the remittance basis charge (RBC), of £30,000 for years eight to 12 and £60,000 for years 13 to 15. From year 16 onwards, the remittance basis is no longer available.
Claiming the remittance basis
According to HMRC statistics, there were 76,500 taxpayers claiming non-dom status but an estimated 2,000 of those were paying the RBC in 2020. In other words, there were around 2,000 non-doms who had lived in the UK for at least seven years who had enough foreign wealth to make it worth them paying the RBC. Since it is only worth paying the RBC if your foreign income is £67,000 or more, it is very likely that a substantial proportion of the remittance basis users have relatively little overseas wealth.In 2020, around 45,000 people claimed the remittance basis, of whom approximately 43,000 were short-term UK residents. In theory, all of these individuals could be billionaires saving huge amounts of tax. If so, almost all of them must be leaving the UK after seven years since they do not go on to pay the RBC. The more likely scenario is that most of these new arrivals claim the remittance basis in the first seven years 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.
Checking the figures
This means that the majority of the ‘lost’ tax identified by Warwick University is likely to be concentrated in the hands of the 500 or so non-doms who, according to latest statistics, currently pay the RBC of £60,000. Assuming that, say, £2.5bn comes from this group, on average, each person would need to receive annual offshore income of £11.1m, or make annual foreign capital gains of £25m. If the £3.2bn is split across all 2,000 RBC payers, this would require each person to receive annual foreign income of over £3.5m.
Whilst some remittance basis users may have that amount of wealth, it is a stretch to believe that most will. Anyone whose foreign income is generally around £200,000 could save tax by paying the £60,000 RBC, so it is likely that a good portion of the 500 long-term claimants may have much more modest levels of wealth.
From the data available, it is not possible to say the Warwick 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 are much lower than suggested.
The authors of the Warwick study believe that only around 77 non-doms will leave the UK due to the abolition of the remittance basis, based on the fact that not many non-doms left the UK after the 2017 changes which introduced a 15-year time limit for claiming the remittance basis.
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.
If the Labour changes really do attempt to raise large amounts of tax from a very small, wealthy and mobile group of individuals, the outcome will 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.
Many of our European neighbours already 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 a form of the non-dom regime. Switzerland remains a popular destination precisely because it offers a lump sum taxation regime. More recently, a number of European countries have introduced ‘digital nomad visas’ which are specifically designed to attract non-Europeans who can support themselves, and some of those come with a privileged tax status as well. When our European neighbours have recognised the value of having their own form of a non-dom regime, it seems curious for the UK to ditch the system that has been basis for other countries to copy.