UK ministers are expected to reverse a technical element of Labour’s non-dom tax changes relating to money held in overseas bank accounts as they steer legislation to enact the October Budget through parliament.
A provision in the Finance Bill would have meant non-doms who stayed in the UK past April incurred tax on money moved through overseas bank accounts which they had earned in prior years when they had been exempt from UK taxes, according to lawyers.
A Treasury official on Monday said changes to reverse the effect of the provision were pending ministerial sign-off.
The Treasury said: “We are committed to engaging with stakeholders to ensure the non-doms reforms work as well as possible. As is usual we are considering any technical comments on the legislation as part of this process.”
The expected change would be the latest tweak to chancellor Rachel Reeves’ move to abolish non-dom status, which also introduced tax on offshore trusts and made non-doms’ worldwide assets liable to inheritance tax.
Last month Reeves announced a minor change to the controversial policy, which tax advisers say has spurred an exodus of the wealthy, to make it easier for non-doms to bring back foreign income and gains at a favourable tax rate.
For years, the UK offered non-doms — wealthy foreigners resident in the UK — the opportunity to avoid British taxes on their overseas income and gains by claiming the “remittance basis”, which meant they only paid UK taxes on monies brought onshore.
As part of her Budget, Reeves abolished the remittance basis so non-doms who remain in the country have to pay tax on new foreign income and gains, like ordinary UK-domiciled taxpayers.
But foreign income and gains previously earned by non-doms under the remittance basis are meant under Labour’s plans to remain untaxed unless brought into the UK.
As part of the non-dom changes in the Finance Bill, the UK would have applied statutory, rather than common-law, rules about capital gains tax to debts. This change would mean debts were considered as situated wherever the creditor is resident.
Money in bank accounts is considered debt owed to the account holder, so making a deposit in a foreign bank account would create a new debt, which the provisions would have classed as bringing the money back into the UK and therefore incurring tax.
The Treasury official said the planned amendments to the Finance Bill would avoid this outcome. They did not specify what change would be made.
Christopher Groves, a partner at law firm Withers, said it was “obviously wrong” if the change meant money put into a bank account anywhere in the world by a non-dom would be treated as having been brought into the UK.
Groves added he thought the change was most likely to be an “unintended consequence” rather than a strategy: “I think that the first draft of the legislation is not perfect, which, given how complicated it is, is not hugely surprising.”
Dominic Lawrance, a partner at law firm Charles Russell Speechlys, told HMRC in a letter earlier this month that it was “astounding” if a non-dom who had used the remittance basis became liable for tax “by transferring cash to a non-UK bank account in his or her name”.
Professional bodies Step, which represents lawyers and accountants, and the Chartered Institute of Taxation have both made representations to HMRC to warn about the change.
The CIOT wrote that “there should not be such different and complicated rules introduced at this late stage to determine what is a taxable remittance”.
