Election 2015: Why Ed Miliband’s non-dom policy makes sense

Ed Miliband has announced another policy (will it never end?). This one makes some sense. It is the abolition of ‘non-dom’ tax status in the UK.

Anyone who is domiciled in another country (this basically means that they claim their true home is abroad) can use their status to avoid paying UK taxes on foreign earnings and capital gains. This is a dream election topic for Labour – playing as it does to all the inequality and fairness rhetoric they, along with the SNP and much of the media, so enjoy.

But it is fair to say that it is a topic Labour should be dealing with. Why should one largish group of people – around 115,000 of them – resident in a country be treated better (or even differently) for personal tax purposes than the others?

Non-dom status is a legacy of the UK’s colonial past that once made sense (why not be nice to those spreading our commercial empire globally).  It was also highly instrumental in attracting the international capital which has made London the de facto capital of Europe.

But it doesn’t make sense any more – not for the tax system in general, and not for a large number of the non-doms themselves.

There are, however, two key points to make here – one which Ed has addressed and one which he has not. The first is that there are different kinds of non-doms – those who are British and UK born but have inherited their non-dom status from foreign-born parents; and those who are foreign born, and intend at some point to return home.

It makes sense for the former group to lose their non-dom status sharpish. And it makes sense for the members of the latter who are here for the long term to pay our taxes too.

But as Ed says, it makes sense too for the short-termers to have a few years’ grace before they have to go to the trouble of arranging their affairs to suit UK tax law. He is suggesting two to three years. I suspect he might have to go for more like five to seven – maybe ten – with a ‘no returns’ rule of some kind.

International tax competition is intense at every level – I’m told that New York hedge fund managers like to base themselves in Florida these days, and spend only a few days a month in NY so as to pay Florida’s lower taxes. The full-on abolition of non-dom status would mean London would no longer be the financial centre of choice for the world’s billionaires. We might all like to think this doesn’t matter. But it really does.

The second point – the one that Ed does not address – is the nightmare administration involved in this. It already doesn’t make sense for many of the UK’s long-term resident-non doms to be non-doms. If you have inherited your status from your father (you can’t inherit it from your mother!) and you aren’t super-rich, you are probably paying normal UK tax on your non-UK assets anyway – you have a choice of paying this or paying the non-dom charge of up to £90,000 a year.

For the only moderately rich, ordinary tax will be the better deal. So a good many of these non-doms are pretty keen to dump their status and move all their money back onshore anyway. It’s worth noting that there are probably several million people in the UK who could claim non-dom status if they fancied it – I could, for example – but they don’t, for the simple reason that it wouldn’t make any difference to their tax status.

So here’s the problem: how do you go from being a non-dom to not being a non-dom? There are a few examples of people having been un-non-dommed – Lord Ashcroft and Zac Goldsmith being the big names – but there is no set system for doing so and the admin difficulties are huge.

To bring your money into the UK tax fold you have to pay tax due on it under UK law – unless it is demonstrably ‘clean capital’, which in practice is quite hard to demonstrate.  Thus bringing capital into the UK means figuring out where it all came from, calculating what is income, what is capital, what is a gain, what might or might not have had some other kind of tax exempt status, and so on and so on. It is just impossible to make this fair. It is a reporting and compliance nightmare, and is the reason non-doms don’t un-non-dom very often.

So what’s the answer? I’d go for abolition of all non-dom status with the exception of any residents who are only with us for ten years. Then I would introduce a one-off amnesty for all current non-doms to normalise all their affairs without being subjected to whopping tax bills.

If that’s too much for the electorate to swallow (and it could be), perhaps a one off wealth tax on all normalised assets should do it – perhaps in the region of 1%-2%.