The UK's proposed non-dom changes were originally hailed as not only removing unfairness in the tax system, but also as a tax-generating measure. In the Labour Party's election manifesto, it was anticipated the measures would generate £5.23 billion by 2028/29, which money was allocated to fund NHS appointments, new scanners, free primary school breakfast clubs and investment in HMRC to reduce tax avoidance.
Reports in the media suggest that the OBR may now have concluded that the changes will in fact result in a net loss for the Treasury. This is perhaps unsurprising given non-UK domiciled persons are, by definition, internationally connected and often have properties, other assets and family and social connections in multiple jurisdictions, so can relatively easily relocate if the UK no longer feels like the best option for them and their families.
Given the Labour Party's stated commitment to the changes, both whilst in opposition and now in Government, as well as having already allocated the originally anticipated additional revenue, this puts Chancellor Rachel Reeves in a difficult position. Her options are:
1. Push through the changes as originally announced
Given the Chancellor's repeated commentary about the state of the UK's public finances, the manifesto commitment to balance the books and her emphasis on the importance of obtaining OBR projections before any fiscal event, if she proceeds with the changes knowing that they will actually result in a loss of revenue, she would face tough questions as to her reasoning.
2. Drop the changes entirely
This seems equally difficult for the Chancellor, given her consistent support of the general premise of the changes even whilst in opposition and her Party's manifesto spending commitments. There are also aspects of the changes which have been widely commended as sensible, such as shifting exposure to inheritance tax from a domicile-based system – which can be uncertain and occasionally lead to unexpected outcomes – to a residence-based system.
3. Adapt the proposals to ensure they generate revenue
In practice, it seems most likely that the Chancellor will want to review the proposals in light of the OBR's estimates and ascertain how they can be adapted to achieve the desired policy objectives of "addressing unfairness" whilst also ensuring the regime is "as competitive as possible".
Whilst few would object to the principle that a tax regime should be "fair", it's much harder to define what that looks like in practice. A regime which deters UHNW individuals from living, working, investing and spending in the UK, and paying UK tax in the process, only increases the tax burden on your average UK resident, so a key factor in this equation must be ensuring the UK remains attractive to wealthy individuals. The balance lies in creating a tax regime which not only makes the UK an appealing option for internationally mobile UHNWs but also ensures that they pay a "fair" amount of tax in the process.
Numerous other jurisdictions have realised the potential tax revenue from attracting UHNW individuals and targeted them with bespoke tax regimes:
- Italy allows new residents to pay a 'flat tax' of €200,000 per year (recently increased from €100,000) in lieu of Italian tax on almost all non-Italian income and gains, as well as an exemption from gift and inheritance taxes on non-Italian assets. The regime is available for 15 years and, in contrast to the UK's current remittance basis of taxation, imposes no tax charge if income and gains covered by the flat tax are brought to Italy.
- Greece similarly allows new residents to pay a 'flat tax' of €100,000 per year in lieu of Greek tax on almost all non-Greek income and gains, as well as an exemption from gift and inheritance taxes on non-Greek assets. Again, the regime is available for 15 years and there is no tax charge if income and gains covered by the flat tax are brought to Greece.
- Spain allows those moving to Spain for work to pay tax at a flat rate of 24% on Spanish income up to €600,000, and no Spanish tax on non-Spanish income, instead of progressive rates up to 47%. The regime is available for six years.
- Several Swiss cantons allow non-Swiss citizens to be taxed pursuant to the 'forfait' regime, by which individuals are not taxed on their actual income, gains and wealth but rather on the basis of notional deemed income and living expenses.
- If the UK is to remain attractive to the wealthiest internationally mobile individuals, and the potential tax revenue which they could generate, the Chancellor may well be considering these competitor regimes to ascertain how the UK could and should fit in. There is scope to target a regime at exactly who the Chancellor wishes to attract: for example, the Spanish regime is only available to those who work in Spain, whilst conversely the Swiss forfait regime is only available to those who do not work in Switzerland. Historically the UK has proven a popular location for international individuals for a wide range of reasons including work opportunities, schools, security and lifestyle. The precise form of the new tax regime will be key in determining if and to what extent that continues to be the case.
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This note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. We cannot provide legal advice on the non-UK jurisdictions mentioned in this note and we can direct you to our network of overseas lawyers and advisers for more information.