According to the latest figures from HMRC, the number of individuals claiming non-dom status in the UK has fallen for the third year running, dropping from 90,500 in 2016/17 to 78,300 in 2017/18. There are a variety of complex factors at the root of this decline – which may not have bottomed out just yet – and which continue to impact the strategies and decision making of non-doms and globally mobile HNWIs more widely.
2017 – a turning point
Many predicted that Brexit would cause a flight of international capital away from the UK, but this has arguably had less of an effect, so far at least, than recent changes to domestic tax policy.
Firstly, and perhaps most notably for HMRC's most recent statistics, changes to the tax system which came into effect on 6 April 2017 were significant and far reaching for non-doms. In effect, from this date individuals previously eligible for non-domiciled status became UK domiciled for all tax purposes, including capital gains tax and income tax if they had been resident for 15 out of the last 20 tax years. Before this date, individuals only became automatically UK domiciled if they had been resident for 17 out of 20 tax years and this is only applied to Inheritance Tax.
It is likely that these reforms will have led many individuals to assess their positions, and will almost certainly have resulted in some long term resident non-doms actually leaving the UK and becoming non-resident to protect their overseas wealth from the UK tax net. On the other hand, some will instead have become UK domiciled for tax purposes. Both scenarios will have contributed to HMRC's reported drop in non-doms.
At the same time, a number of cumulative changes to the tax regime for owning property has contributed in large part to the dampening on the UK being an attractive proposition for non-doms. Indeed, the only remaining exemption for non-residents is the UK's Inheritance Tax exemption on commercial property, if held within an offshore company or trust structure.
A slew of reforms began to be implemented from 2015 – corresponding to the start of the downward non-dom curve. This includes:
- Since 6 April 2015, non-residents and non-doms are liable for Capital Gains Tax and Inheritance Tax on UK residential property.
- From 6 April 2017, non-residents owning UK residential property via an offshore company or trust structure became subject to Inheritance Tax.
At the same time, trusts or offshore companies owning UK residential property are subject to ATED (annual tax on enveloped dwellings), Capital Gains Tax and Inheritance Tax as well as higher Stamp Duty Land Tax.
Moreover, this clampdown shows no sign of abating, with non-residents and non-doms now having to pay Capital Gains Tax on UK commercial property assets with effect from 6 April 2019.
Don't mention the B word…
Clearly it is too soon to tell just what effect Brexit will have on the non-dom figures, with the downward slide starting before the 2016 referendum. However, anecdotally, there have been cases of non-doms choosing to leave the UK at least in part due to the political uncertainty, which may impact on the tax and business landscape – including around those tax allowances which are impacted by virtue of our membership of the EU.
To take one example, upon an individual's death the UK system provides up to 100% relief on shares in a private trading company wherever based in the world. Conversely, a similar relief applies in some EU countries, but that is only on the basis that the company is based in the EU. So, for instance, a German resident owning a UK trading business post Brexit may not get the same tax relief as is the case now, whilst the UK is a member of the EU.
Where next for the non-doms?
The tax landscape for individuals with international sources of wealth is increasing in complexity, while the pending transposition of 5th Anti-Money Laundering Directive into UK law (the government's consultation closed in June 2019 and we expect an update soon) will require enhanced transparency measures and information sharing in relation to financial structures – which will, again, be a key consideration for HNWs rightly conscious of privacy and protection.
Looking ahead, therefore, many non-doms will be actively considering their positions and will likely be facing a choice between either becoming UK-domiciled or seeking to move their affairs to another jurisdiction.
It is not all doom and gloom however, with HMRC's statistics showing that Business Investment Relief is at its highest ever level, suggesting that the UK remains a destination of choice for business investment – at least for now. According to the figures, in 2016-17 alone £979 million was
invested in the UK by the, comparatively, tiny pool of non-dom individuals. With the government gearing up to manage the fall out of Brexit – deal or no deal – the question will be to what extent there is a move to arrest the non-dom slide and do more to encourage international wealth to invest and spend in the UK.
Rebecca Fisher, Partner at Russell-Cooke.
Rebecca specialises in advising families and individuals on all aspects of private client law including wills, estate planning, administration of estates, trusts and powers of attorney. She also leads the firm's Family Office offering.