Changes to the tax rules for non-doms could reduce tax revenue if two-fifths of those affected decide to leave the UK, according to a report commissioned by Irwin Mitchell Private Wealth.
The report produced by the Centre for Economic and Business Research (Cebr) is based on a freedom of information request to HMRC as well as official statistics.
It sets out possible scenarios if individuals who have lived in the UK for a long period decide to leave the country when the rules on non-dom status change after 5 April 2017.
The report finds that growing numbers of UK residents have been claiming non-dom status in recent years, with an estimated 122,708 registered in 2016-17. However, Cebr predicts the number will fall sharply (by 12% in 2017-18) following the implementation of new reforms.
The report also highlights that the 119,260 taxpayers who claimed non-dom status in 2014-15 paid income and capital gains tax of £6.9 billion, accounting for roughly 4% of the total tax take from income and capital gains.
The Office for Budget Responsibility projects that the changes to non-dom taxation will generate an additional £995m over the next four years.
However, if the reforms trigger significant departures of non-doms from the UK, for the OBR’s target to be met there will have to be a significant increase in arrivals of non-doms to the UK. Otherwise, individuals who lose their non-dom status but remain UK resident would have to generate £2.6 billion in tax revenues until the tax year 2020-21 or over £256,000 per individual per year.
The report calculates that if fewer than 38% of those who currently use the remittance basis but who will lose their non-dom status leave the UK, the net revenue impact of the changes will be positive. However, if more than 38% leave, the changes could have a negative effect.
Alex Ruffel, a tax partner at Irwin Mitchell Private Wealth said:
“The report is clear that non-doms make a valuable contribution to the national income.
“What the research shows is that there is a tipping point at which the UK economy will benefit from the changes.”
Oliver Kolodseike, senior Economist at Cebr said:
“On a purely financial basis it may make sense for some of the wealthiest non-doms to settle somewhere outside the UK, with Italy likely to become a more and more attractive destination given that it is implementing a new tax regime favouring the international elite.
"However, the decision on whether or not to leave a country is influenced by many other factors such as economic and political stability, a functioning health system, education, national security and of course personal preference.”
Alex Ruffel added:
“After April 6, non-doms who have lived in the UK in 15 out of the previous 20 tax years will be ‘deemed domiciled’ in the UK for income tax, capital gains tax and inheritance tax purposes.
“Even those who will become immediately domiciled can take steps to help them adjust and adapt, including using transitional reliefs introduced with the new rules, such as rebasing for capital gains tax and going through a ‘cleansing’ process to reorganise their accounts and assets.”
Alex Ruffel, Partner
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Tax reform Q&A
Published: 3 April 2017
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