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The imminent UK General Election poses a potential threat to the wealthy in the event of a Labour win. Those who currently enjoy the privileges of UK Non-Dom Status could see those advantages abolished if Corbyn moves into Number 10. Discover why many of the UK Wealthy Non-Doms are exploring the possibility of Back-Up Plans.
Earlier this year I predicted in a blog that the fear that the Labour Party forming the next UK government would be the triggering event of 2019 for UK HNWs. Even more so than the eventual outcome of the Brexit issue itself. The announcement of a December 12th election has moved this triggering event to centre-stage for the wealthy in the UK.
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UK Non-Dom Status and UK Domiciliaries
The wealthy in the UK are basically divided into two separate groups: the Non-Doms and the UK Domiciliaries. The Non-Doms are those who qualify for the ‘Remittance Tax Basis’ system. The Remittance Tax Basis has been in place for well over a century and is the reason that the UK has enjoyed the benefit of having more than its fair share of the world’s wealthiest people.
This tax regime only requires Non-Doms to pay:
- UK income tax on their UK source or remitted foreign income, and
- UK estate tax on their UK situs property.
Along with paying tax on this basis, the major economic benefits of Non-Doms to the UK have been consumer spending and investment. Accompanying the high levels of spending and investment are VAT, property and other tax revenues. Not to mention the vast array of service industries which cater to their wide range of needs.
In contrast, UK Domiciliaries pay:
- income and capital gains taxes on their world-wide income,and
- estate tax on their world-wide assets.
So clearly there are substantial financial benefits accruing to Non-Doms…but for how long?
Labour and UK Non Dom Status
In September 2019, Labour’s Shadow Chancellor John McDonnell announced that if Labour were to form the next government, they would abolish the Remittance tax regime in their first budget. This would mean that current Non-Doms would immediately be subject to the same tax burden as UK Domiciliaries. This threat against Non-Doms was followed with later undertakings by Labour Leader Jeremy Corbyn and other Labour politicians to bring in tax policies which would fulfill their shared belief that “Billionaires should not exist”. While details have not yet been provided, early indications point to significant increases in income and capital gains rates and changes to the estate tax system which would bite deeply.
Not surprisingly, such bold statements by Mr Corbyn and company generated attention grabbing newspaper headlines. “Super-rich prepare to leave UK ‘within minutes’ if Labour wins election”, for example. For once the headlines and dire predictions are not far off. Indeed, this response is not unreasonable if you consider the significant additional tax burden that will fall on the UK’s wealthy should Labour form the next government. Precise estimates of the increase will depend on a particular individual’s situation and the final proposals. However, roughly speaking for Non-Doms their tax will rise to a minimum 40% annual tax on worldwide income. This will be accompanied by a minimum 40% estate tax on everything over £325K. Furthermore, these rates are sure to go up even further for both Non-Doms and UK Domiciliaries under the new Labour regime.
What are Labour doing?
So why would Labour announce such dramatic changes to the tax regime if the targets of the change…the Non-Doms – could do the math and leave “in minutes”? The BIG assumption that Labour is making is that even wealthy UK residents cannot simply move ‘within minutes’. Labour believes that avoiding the impact of their new tax policies will require the individual and their family to both:
- Find a new favourable tax home, AND
- Sever tax residency in the UK.
Labour may assume that these two steps will be too difficult for most Non-Doms. Therefore, they will stay and generate BIG tax revenues for the Treasury.
Back-up Plans enable a quick exit
What Labour has not considered is that in addition to being wealthy, Non-Doms are often practical and forward-thinking. As a result, most have…or will…put into place an effective Back-Up Plan. This plan will identify a favourable new tax home for the family and have all the requisite elements in place for the Non-Dom to sever UK tax residency in the event the promised tax changes materialize.
Depending on the new tax home and the client’s situation, the first step may involve acquiring an immigration residency permit. There will also be possible pre-immigration tax planning to do, or applying to tax authorities requesting advantageous tax treatment. Severing UK tax residence, however, is much more involved than simply transferring portfolio assets and buying a plane ticket. Professional advice is essential.
Those UK Non-Dom Status individuals who do not already have a proper Back-Up Plan in place should engage a small team of advisors to map out a Back-Up Plan that will meet their personal and family needs. Their team should include their current UK tax advisor(s) who will estimate their future potential tax burden. They will also help to outline the steps that need to be taken in the UK to sever tax residency. The other half of the team will be responsible for identifying a potential new tax home that will meet all the family’s needs and preferences. Included in this work will be the steps, costs and timing to move the family to this new tax home.
Once their Back-Up Plan is mapped out with its costs and timing AND the future tax burden under a Labour government calculated, the client can then make an informed decision. They can choose whether or not they want to go ahead and put the elements in place that will give them the ability … and peace of mind…to “leave within minutes” should Labour be poised to form the next UK government.
Conclusions
Brexit tactical voting and daily emerging issues makes the December election outcome uncertain. Knowing both “the cost of failure” and “the cost and timing to avoid failure” is critical for HNW UK residents. Moreover, now that Labour have shown their tax hand, even if they lose the upcoming election, just getting a quote on a Back-Up Plan is definitely worth the effort. Given the volatility of UK politics in recent years and the uncertainty surrounding Brexit, there is a more than a remote possibility that Labour could win an election in the near future. If you have UK Non-Dom status it’s best to plan for the worst and hope for the best!
If you would like to find out more about creating a personal back-up plan then get in touch.
