In a threat sure to alert wealthy individuals with ties to Asia and other regions, the UK opposition Labour Party says it wants to scrap the non-domiciled residents regime. The UK elections are on 7 May.

(This item is being republished here because people living in Asia have been among those benefiting from the UK's non-dom regime and may be forced to reconsider their options if the system comes to an end.)

Wealth managers in the UK tempted to dismiss the 7 May general election with a bored expression will have been jolted by the announcement by the opposition Labour Party that it wants to scrap the long-standing “non-dom” status that has been associated to some extent with London’s prowess as a hub for wealthy individuals.

Shadow chancellor, or shadow finance minister, Ed Balls, has pledged that a future Labour government, if elected, will abolish the situation where non-domiciled UK residents pay a fixed annual levy to enjoy the right to not pay tax on worldwide income and capital gains if these moneys stay out of the country. The cost of making that annual choice was recently hiked to £90,000 for long-term residents.

However, while the annual levy on non-doms and other measures to tighten the 200-year-old non-dom regime – which finds few imitators in other countries – have been enacted to answer claims that the system gives wealthy people an unfair status, the Labour proposal has come as a shock to wealth industry professionals.

“As a keen supporter of social justice, it saddens me immensely to hear that Labour has today announced proposals which will have a cataclysmic effect on the British economy.  There is no room for argument that non-doms benefit Britain - countless studies and successive arguments appear to have concluded the same. It is better to have them here and contributing to the economy than moving back to Paris, New York or Moscow and contributing nothing,” Sophie Dworetzsky, partner at Withers, the international law firm, said in a statement.

The practice has been defended because non-dom status encourages wealthy people to live in the UK who might not otherwise do so, bringing in revenue to the UK. Ending such a system might be seen as working contrary to other measures the UK has in place to encourage wealthy people to work in the country, such as the UK’s investor visa and entrepreneur visa systems.

“A non-dom paying the flat fee of £60,000 would comfortably put them in the top proportion in terms of tax contribution. They may simply choose to become non-tax resident in the UK, and with the UK’s Statutory Residence Test (to determine the tax residency of individuals) it could be possible for a non-dom to still spend up to 120 days in the UK without becoming tax resident. If this were to happen, the Treasury would lose out on any tax revenue and the wider economic contribution altogether,” Nimesh Shah, partner at Blick Rothenberg, the accountants, said.
 
“The next government must assess in detail the economic impact of any further changes to the non-domicile regime, otherwise they could be unknowingly faced with a severe dent to the UK’s economy,” he said.

A study published in 2013 by University College London showed that immigrants to the UK since 2000 have made a "substantial” contribution to public finances. The study went on to note immigrants from the EEA contributed 34 per cent more to the fiscal system than they took out, with a net fiscal contribution of £22.1 billion. Immigrants from non-EEA countries made a net fiscal contribution of £2.9 billion, representing 2 per cent more than they took out.
 
“In addition to actual tax contribution, the economic and social benefits non-doms bring to the UK must not be overlooked. These benefits can include expertise and intellectual property in certain sectors, such as banking and finance, medicine, information technology and sciences. ‘Non-doms’ also bring entrepreneurial drive and choose to base their businesses in the UK, which lead to generating tax receipts from VAT and corporate tax, and income tax and National Insurance by employing individuals. Like any other UK taxpayer, ‘non-doms’ naturally buy goods and services in the UK thereby contributing to VAT receipts as well as supporting the UK economy,” Shah said.

According to James Hender, head of private wealth at Saffery Champness, Labour’s proposal is not a total surprise because various political parties have sought to take more money from non-doms in recent years, suggesting the system is doomed.

“I have already been taking calls from clients who are concerned about this proposal and want to plan ahead. There will be a stark choice for some if the Labour Party wins the election: adapt or leave,” he said.

“The non-dom regime is an anomaly compared to other countries, which tax their residents on their worldwide income and capital gains. However, the regime has undoubtedly contributed to the UK’s large financial sector and it has made our country attractive as a destination for international investors and financiers,” Hender continued.

“This change could be the last straw for certain people who are being hit with higher taxes from different directions, including the proposal for a mansion tax on their properties. There are other jurisdictions, such as Hong Kong, which offers both a lower tax rate and also only taxes locally sourced income, which will welcome them. The proposal to have an exemption for temporary residents is welcome in the circumstances, but the details are thin,” he added.

Meanwhile, Simon Walker, director of the business lobby group the Institute of Directors, said the move was clever politically but poor on economic grounds.

“It is very unclear what additional revenue would be raised, but the UK’s international reputation would be put at risk. This country has benefited enormously from attracting some of the most successful businesses and entrepreneurs in the world, with the previous Labour government recognising the benefits of an internationally competitive tax system,” he was quoted as saying.

“While there may be little public sympathy for those who stand to be affected by reforms to non-dom status, the truth is that these things matter. There is a serious risk that large numbers of the international financial community, who have headquartered themselves in London at least in part because of our tax regime, will now exit the country. Politicians at the height of an election campaign may consider this a price worth paying, but we do not,” Walker added.

(Editor’s note: In some ways it is surprising that a system such as the UK’s non-dom regime, lasting for around two centuries, has existed as long as it has. While there are considerable benefits to encouraging wealthy individuals to live in the country, the apparent anomaly of their being able to keep a lot of their worldwide capital gains and income out of the country, subject to paying an annual levy, is politically sensitive and hard to defend on strict egalitarian grounds. The damage that ending the system will cause is unlikely to trouble the kind of people who favour this policy, any more than they will be troubled by a “Mansion Tax” or other measures aimed at “the rich”. The sad fact is that far too few politicians have made the case for encouraging and celebrating wealth creation and have instead found it easy to go along with a general attack on wealth or “unfairness”. If the non-dom system does go, the property market in London will suffer at the top end, and we may see some wealth management firms redeploy staff from London to capture any associated exodus. The assault on non-doms is also, to some extent, an example of globalisation in retreat.)