Planning ahead: impact of the 2017 non dom changes

16th November ‘20

On 30th July 2020 HMRC provided updated Statistics on Non-Domiciled Taxpayers in the UK 2007-08 to 2018-19. The report makes interesting reading in the context of the debate as to how the costs relating to the coronavirus pandemic are to be funded. There is a suggestion that the number of non-UK domiciled taxpayers changing status to become domiciled has slowed down. However, there is also an inference that the level of tax revenue that can be recovered from the non-UK domiciled community is reaching its ceiling, and that if further sources of fiscal revenue are required in the future the Chancellor should look to other members of British Society.

The non dom changes

Major changes to the taxation of non-UK domiciliaries were made by the 2017 Finance Acts. It meant that long-term UK resident individuals who are legally domiciled outside the UK were unable to take advantage of the remittance tax rules in relation to new sources of foreign income and gain proceeds.

The reforms have tightened up the rules but have also resulted in legislation that is particularly dense and difficult to follow. The rules are now inordinately complex, and many of the unexpected side effects of these changes are still beginning to emerge.

The new statistical evidence

The HMRC published briefing shows that in 2018-19, there were an estimated 78,000 individuals claiming non-domiciled taxpayer status in the UK on their Self-Assessment tax returns. This was slightly down from 78,700 in the previous year.

In the prior two years the estimated number of non-domiciled taxpayers has been falling due to these taxpayers either becoming domiciled or no longer paying tax in the UK. Typically, in this last instance, this would be because they had ceased to be UK resident. The headline amount of tax collected in 2017-18 is still markedly less than it was in 2015-16, but the rate of decline may be slowing.

In 2018-19 this reduction in the number of non-domiciled taxpayers appears to have slowed down. HMRC suggest that the impact of the major changes to the taxation rules for non-UK domiciliaries is beginning to stabilise. However, it may be too early to make this assessment.

HMRC estimate that non-UK domiciled taxpayers paid £7.828bn in UK Income Tax, Capital Gains Tax (CGT) and National Insurance contribution. This was apparently a slight increase from the previous year’s estimate of £7.57bn. The comparable figure in 2016-17 was £9.568bn, a difference of almost £2bn.

It is important to put the amount of tax raised into context. HMRC statistics reveal that a total of £5.2bn was received during 2019-20 in relation to inheritance tax, a decrease of 4% (£223 million) on 2018-19. The major difference is that the sector of society that potentially contributes to that yield is the entire population of UK taxpayers rather than the very much smaller population of UK resident non-UK domiciled individuals.

Again, to put this into context the yield from inheritance tax represents less than 1% of the overall tax yield. Similarly, it is interesting to consider the yield from CGT. HMRC statistics reveal that in 2018-19, the total CGT liability was £9.5bn for 276,000 CGT taxpayers. This liability was realised on £62.8bn of chargeable gains.

The problem is that the Chancellor cannot afford to lose the level of tax revenue he receives from the non-dom community. This suggests that he should avoid introducing any further changes in this area in the immediate future. The impact of those original changes is still running through the system and there are likely to be some unexpected hiccups along the way because the legislation has now become much too complicated. There is the ever-present risk that further changes will simply kill the goose that lays the golden egg rather than increase yield.

A case in point is the operation of the Business Investment Relief scheme which was designed to encourage non-UK domiciled individuals to invest in UK business ventures using funds that would be otherwise assessed on the remittance basis.

The HMRC statistical evidence shows that the cumulative value of investments in UK businesses on which Business Investment Relief has been claimed is £4.018bn. In 2017-18 alone, £512m was invested in the UK from 300 non-UK domiciled taxpayers. The fact that only 300 taxpayers were involved is rather disappointing and suggests that the rules need to be streamlined even further.

Conclusion

No one is suggesting that an immediate increase in taxes is on the cards because of the harm it would cause to the economy. But at some stage taxes are going to have to rise. The evidence strongly suggests that if the Chancellor wants to raise additional revenue once we have cleared the immediate aftermath caused by the pandemic, he should not seek to do so at the expense of the wider non dom community. A more productive approach might be to review the terms of the Business Investment Relief to further encourage non-UK domiciled entrepreneurs to bring their funds into the UK to help rebuild the UK economy.

Andrew Cockman is a Tax Consultant for Calibrate Law, if you would like to discuss what options might work for you, or have any questions arising from this briefing note, please contact tax@calibrate-law.com

This post is intended to be a guide for clients and other interested parties. The information is believed to be correct at the date of publication but should not be relied upon as a substitute for professional advice. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in these publications.

© 2020 AMC Tax Consulting Ltd.

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