The shortcomings of the UK system require reform, not outright abolition, argues the law firm as it sets out proposed alterations.

The UK’s centuries-old resident non-domicile system could be axed if the opposition Labour Party achieves power in a general election. International law firm Withers argues that this is a mistake and proposes reforms instead.

Withers argues that scapping the non-dom system will be damaging. It wants to open the new regime to anyone who hasn’t lived in the UK for 10 years, removing the historic and complex “domicile” approach. It suggests a higher flat fee – charging a £100,000 ($127,327) annual fee which is competitive in comparison with other international regimes and moves away from the current complex rules.

The Labour Party – which is currently ahead of the ruling Conservative Party in public opinion polls – has targeted the system for abolition, claiming that it is unfair. Defenders argue that this is based on a mistaken understanding of how the system works, and that driving wealthy individuals from the UK will force up taxes on the broad UK population. (This news service has written and spoken about the topic here, here and here, for example.)

With countries such as Ireland and Italy having systems that in some way resemble the UK’s non-dom regime, there is also a risk that some HNW individuals will leave the UK. Already, the number of non-doms has declined.

Arguments about the issue highlight how perceptions of tax fairness, even if mistaken, are hot-button political matters. Non-doms pay tax on their UK income and on money they bring into the UK but do not pay tax on other income and capital gains that they make outside of the UK. The UK has a territorial tax code, as do most nations other than the US. Income and wealth sourced in the UK, for example, is taxed. Money that stays out of the UK and is not remitted to the country is not taxed (there are some caveats to this).

Reform ideas
Rules should also be changed to remove any obstacles for bringing money into the UK to invest in businesses; the system should dovetail more closely with the UK's investor visa policy to attract talented and entrepreneurial individuals and their families.

Among other ideas, Withers wants to set a 15-year limit to non-dom status, providing clarity for those who choose to remain longer term. To avoid a mass exodus of current non-doms, a government should offer a measured transfer into the new regime.

Withers' research and reform recommendations come as non-doms prepare for potential changes to the regime after the next UK election, expected in late 2024. Labour has promised to scrap non-dom status entirely if it wins the election, whilst the Conservatives are under pressure to review the regime rules.

“Does the current non-dom regime do enough to attract talented, entrepreneurial people to the UK? By any reasonable view, the answer is no,” Christopher Groves, partner in Withers' private client and tax team, said. “The whole system is ripe for an upgrade and our recommendations would make the UK a competitive, appealing destination for globally mobile families.”

Groves later elaborated on the firm's reasons for suggesting the proposals.

“It has been quite hard to hear a positive voice about what a well-designed regime could achieve. Now, we have this [debate] all the time in terms of investor and other visas, but not about the non-dom system," he told WealthBriefing. “We want to make a positive contribution to the debate.”

Under the present system, the principal beneficiaries of the non-dom system are people with assets offshore and who spend as little money as possible in the UK, he continued.

“We have an opportunity to create a system that works," Groves added.