Is the non-dom regime unfair?

The non-dom regime has come under the spotlight once again. The Labour party, which has called the system “unfair”, has recently announced proposals to replace the regime. Details of Labour’s alternative scheme which have been announced so far, are that it will only apply to short term temporary residents.

The latest official statistics show 75,700 people claimed the remittance basis of taxation (i.e. non-doms) in 2019/20, and those individuals paid £7.8bn in UK taxes – that’s an average of over £100,000 in taxes per non-dom.

There have also been reports of £1bn in taxes being saved by non-doms. However, this figure must be taken with a pinch of salt. For starters, overseas income and capital gains of non-doms are not reported by these individuals, and any savings figure would be a guess.

The tax take will not necessarily rise by £1bn if the non-dom regime is abolished. In all likelihood, Labour’s proposals could reduce the amount of tax paid by non-doms.

If the non-dom regime is abolished, it is unlikely that non-doms would make the same investment choices as they do now. For example, investment portfolios could be adjusted and held in offshore bonds which defer the time when dividends and gains are taxable. In addition, investments in overseas family companies could be restructured so that dividends are not paid to UK residents. Extremely wealthy non-doms are often well placed to choose how much time they spend in the UK, with the possibility of paying no tax here at all. Like any other taxpayer, non-doms will make legitimate choices to restructure their affairs to minimise the impact of any changes.

We can say with some certainty that non-doms taking advantage of their status pay less tax than UK domiciled persons which most people would argue is unfair. However, many European countries have introduced some kind of preferential tax regime in recent years – Italy has a €100,000 lump sum tax regime; immigrants can pay as little as 7 per cent income tax in Greece; Portugal has its Non-Habitual Residence Regime and Spain has its so-called Beckham rules, both of which broadly exempt foreign income and gains entirely from tax, to name a few.

Further afield, low tax jurisdictions such as the UAE or Monaco charge no personal taxes at all. It may be deemed unfair for non-doms to pay less tax in the UK than everyone else, but the UK is effectively competing with other countries to attract immigrants, and preferential tax rates are influential in considering where people choose to go.

In other words, governments across the globe are actively using different tax rules to encourage certain types of immigrants by creating preferential tax systems. The basis of all of these regimes is that the immigrant pays less tax than the “home” taxpayer.

Labour proposes a new system for short term residents and presumably, these individuals would pay less tax than the “home” taxpayer. In the same way that the non-dom regime is unfair to the home taxpayer, so would this new system. Ultimately, the point is that it is designed to be unfair.

Countries have always used differential tax regimes to encourage immigration and tax systems are becoming more sophisticated as people become more internationally mobile. If Labour is worried about the fairness of the current system, moving to another unfair system does not seem to be the solution.