In a speech given at Warwick University, Labour Party leader Ed Miliband has called for “non-dom status” to be “abolished”. How likely is such a step? And what would the implications be for those who are currently UK resident but non-UK domiciled?

The Labour proposals, as unveiled today, are short on detail. Ed Miliband has stated that “the non-dom rule” would be abolished by a Labour Government and replaced with the principle that “anyone permanently resident in the UK will pay tax in the same way”. It is unclear what Ed Miliband means by “the non-dom rule”; evidently, the intention is to get rid of the remittance basis of taxation, but there is vagueness about whether the special inheritance tax rules for non-UK domiciliaries, and trusts established by them, could also come under fire. In any event, it appears that a Labour Government would allow a special, lenient regime to apply to what Miliband called “real temporary residents, here for a brief period”. He has stated that such individuals would “only have to pay tax on what they earn here [i.e. the UK]”, on the basis that “they will be paying their taxes in their place of permanent residence”.

This stated basis for exempting “real temporary residents” from worldwide taxation is fallacious, because it is not generally true that an individual who is temporarily resident in the UK and temporarily non-resident from his or her country of origin is subject to taxation in that country.  There were, in fact, many aspects of Mr Miliband’s speech which could be quibbled with.  Non-doms are not, as Mr Milliband claimed, “permanently settled” in the UK – that is the whole point about being non-UK domiciled.  And the notion that “subscribing to an overseas newspaper” can found a claim to non-UK domiciled status is comical.  If only it were so easy …

But existing foreign domiciliaries who are resident in the UK may find it hard to see the funny side. The questions they will, naturally, be asking are: how likely is this proposal to be implemented? And what will be the personal implications of this drastic change?

The chances of the Labour Party comprising, or forming part of, the next Government are, of course, anyone’s guess. But it is perhaps reasonable to surmise that, if Ed Miliband does become Prime Minister, he and his Chancellor Ed Balls will (before pressing ahead with this reform) give serious consideration to the potential economic impact. In fiscal terms, the acid test for a Chancellor must be whether it would help or harm the economy - overall, would it increase or decrease tax revenues?

The answer to that is simply unknown. No two individuals in the “res, non-dom” bracket are the same. There are no reliable figures for the “cost” to the Exchequer of a small number of affluent individuals paying tax on the remittance basis, rather than the arising basis. There are a number of reasons for this.

One is that a side-benefit of the remittance basis for non-doms is the fact that they can leave unremitted foreign income and gains out of their tax returns. The result is that the Treasury has no real idea how much extra tax would be generated if these individuals were taxed on such income and gains as they arise.

The second reason is behavioural uncertainty. It is exceptionally difficult to predict how many “res, non-dom” individuals will cease to be UK resident if they are forced onto the arising basis, or will restructure their affairs so as to minimise the fiscal impact of such a change. However, it seems clear that some will leave and others will restructure. For the very wealthiest non-doms, the cost of remaining UK resident as an arising basis taxpayer may run into millions of pounds a year. The decision for them to cease being UK resident (ie, very broadly, to spend less than a quarter of their time in the UK each year) will become easy, as these individuals are (by definition) internationally mobile.

The third reason is the difficulty in evaluating benefits of such individuals spending time in the UK. There are no reliable figures for the amounts wealthy “res, non-doms” spend on UK houses (generating stamp duty revenues), spend on luxury goods in UK shops (generating VAT and other taxes), spend in employing staff (generating income tax and national insurance), spend on professional services (VAT and other taxes) …

This uncertainty is compounded by the impact of the proposed changes on prospective UK residents – those who were planning to come, but may now think again. The very announcement of these proposals by the Labour Party will have made some non-doms who are currently non-UK resident question their plans to move to the UK, and will have sent yet another signal to the global wealthy (and their advisers) that the UK tax system is volatile and less welcoming than other countries which compete to attract such individuals as residents.

It is, perhaps, difficult to argue against the proposition that in some circumstances the present rules can be surprisingly generous, and that there ought, logically, to be some limit on how long an individual can live in the UK, enjoying the benefits of a set of rules devised many years ago and which is intended to be used only by those who have come to the UK from abroad and intend, in due course, to cease residing in the UK. A more sensible option, which would allow some rationalisation of tax laws, would be to bring in a concept of “deemed UK domicile” for the purposes of income tax and CGT, if possible aligning that concept with the “deemed UK domicile” concept which already applies to inheritance tax.

That would allow wealthy individuals time to set up businesses in the UK and contribute to the UK economy, but if they remained resident in the UK for long enough to become “deemed domiciled”, they would become normalised UK taxpayers. Despite what has been said about the UK rules being at odds with the rest of the developed world, several other countries have quite similar rules which are designed to attract new residents by only slowly bringing them into full taxation.

Clearly, wide and careful consultation would be key, alongside a proper analysis of the fiscal benefits of the present legislation. It is widely acknowledged that the non-dom rules are one reason (and admittedly only one reason) for the success of London; and if the price of the continued success of London is retaining those rules in some form, arguably that would be sensible. However, rather than previous Governments having done nothing about the supposed unfairness of this legislation, it would perhaps be more accurate to say it has been looked at many times (especially in recent years) but that it has presumably been concluded that the rules as they stand are in the best overall interests of the British taxpayer.

However, political debate is not always rational, so affected individuals will need to watch this space and be ready to start taking expert advice on their position, following the election – if it becomes clear that the incoming Government has the will to reform these rules. One somewhat consoling aspect of the Labour proposals is that it seems that there will be a significant transitional period, perhaps two years, before any change is actually implemented. In the event of a Labour Government, that period should allow time for the arguments for and against reform to be heard; for Labour’s proposals to evolve; and for preparatory action to be taken.