News indicates that Chancellor Jeremy Hunt is thinking about revising the tax system for non-domiciled residents (non-doms) in his upcoming Budget.
This idea appears to be politically motivated, especially since the Labour Party has committed to eliminating non-dom status should they be victorious in the forthcoming general election.
Around 78,700 individuals in the UK currently hold non-dom status. According to the latest figures from HMRC, they contributed a substantial £12.4 billion in taxes during the 2021-22 fiscal year. However, this number represents a decrease from 137,000 in 2008.
Non-dom residents pay taxes on income and capital gains made in the UK. They can opt to pay taxes on foreign income and gains only when brought into the UK, a decision known as the ‘remittance basis’ claim.
For the first seven years of living in the UK, this claim is free. After that, a yearly fee of £30,000 is applied for the next four years, followed by £60,000 for another two years.
After 15 years of UK residency, non-doms begin to be taxed on a worldwide basis just like UK domiciled individuals.
Potential reform suggestions include completely abolishing the remittance basis, altering the remittance basis threshold, and setting a time limit for the lump sum rule.
Rachel de Souza from RSM UK proposes a drastic measure would be to eliminate the remittance basis entirely and introduce a fresh system. New UK residents could pay a flat annual tax that covers all non-UK income and gains, possibly around £100,000. This flat tax could be available for the first decade of residency in the UK, reflecting the current system while preventing affluent non-doms from moving away due to tax reasons.
An alternative would be to maintain the remittance basis but adjust how one qualifies for it. This could involve imposing a fee from the moment of arrival and increasing it each year until the remittance basis becomes unavailable, perhaps after 10 years.
Both these methods are straightforward to introduce and would generate more tax revenue. Furthermore, in the political arena, the lump sum tax would counteract Labour’s intent to remove non-dom perks.
However, removing tax advantages for non-doms might not sit well with the wealthy international community, potentially driving them to relocate to countries with lower taxes. Winkworth suggests the chancellor reconsider these proposed changes due to their possible adverse effects on the UK’s attractiveness and its property market.
Dominic Agace of Winkworth argues that discouraging affluent individuals who are not bound to the UK may lead them to choose other countries, resulting in the UK losing out on their wealth generation and the anticipated tax revenue. This could have a detrimental impact on London’s appeal and its property market.
Winkworth hopes to see the Budget address help for first-time home buyers, initiatives to support construction tailored to them, and adjustments to the lifetime ISA to reflect property price inflation. They also anticipate a cut in income tax that would aid the country’s recovery in 2024.
Additionally, the firm suggests introducing tax breaks to motivate people to downsize, revitalizing the property market’s dynamics. They also call for the reintroduction of mortgage interest relief to ensure the rental sector remains stocked. Moreover, they push for a reassessment of stamp duty thresholds, which currently do not consider geographical differences in property values, putting strain on London’s families who need more room but are priced out of the market.
Lastly, Winkworth emphasizes the necessity of maintaining London’s international image to attract foreign investment, cautioning against harsh policies that could destabilize the market and affect the housing ecosystem, including construction projects that depend on early investments from international buyers.