Non Dom & Non Domicile Taxation: What are the top reasons to be cheerful?
We are at a rather strange point in the history of international relations.
Travel and technology has made accessible all corners of a world which once seemed impossibly large.
That process has been fuelled in part by an explosion in personal wealth.
According to data published by the Office for National Statistics (ONS) earlier this year, there are now 3.6 million UK households worth more than £1 million – an increase of 29 per cent in just two years.
Look farther afield (and even further upwards in terms of wealth) and the picture is equally impressive…
At the same time as the ONS was detailing the domestic picture, Forbes magazine concluded that there were now 2,208 billionaires (worth an average £3.2 billion) across the globe.
However, as personal enrichment has accelerated, so too has the amount of attention paid to it by the world’s various tax authorities.
Many wealthy individuals have been able to live in the UK, for instance, while arguing that their real domicile is abroad and avoid paying tax on their non-UK income in doing so.
However, a new piece of research suggests that as many as one-quarter of all these so-called ‘non-doms‘ could leave the UK over the course of the next 12 months.
That exodus, the study suggested, would have little to do with the potential uncertainty created by Brexit but be largely connected to what is believed to be a more rigorous tax regime.
For those who are not familiar with these somewhat arcane rules, they provide a special basis of taxation called the ‘remittance basis’. For those who qualify, it allows them the privilege of leaving their foreign income and gains outside the UK without suffering UK tax. If they bring them to the UK then tax will generally be due. If they have UK income (eg a job in the City of London) then they will pay tax under PAYE regardless.
These rules are not a loophole. They were been specifically created (albeit centuries ago) and have been adjusted on several occasions over the years, notably in 2008 and, more recently, in 2017.
From 2017, a long term UK resident non-dom (broadly been resident for 7 years) has had to pay for the privilege of the remittance basis. This charge has been revised over recent years introducing increasing levies for those who have been in the UK for longer periods.
From April last year, non dom tax changes have meant that non-doms who have been resident in the UK for more than 15 of the last 20 years are now ‘deemed domiciled’ and must pay UK income tax on all their worldwide income and gains. In other words, the ability to claim the remittance basis is forfeited.
In tandem, Inheritance Tax (“IHT”) reliefs (excluded property) have been removed from structures which could be utilised to hold UK residential property outside of their taxable estates.
Of course, as I wrote for Private Client Dining Club magazine a few weeks ago in The tax reasons why international private clients are renting, we now have a slew of venomous property taxes which seem likely to affect internationally mobile wealth.
Add to that the stringent penalties associated with HMRC’s continued crackdown on the use of offshore facilities to avoidance tax and Britain might not appear as welcoming to the jet set as once it did.
Whilst the Government and HMRC are wielding the stick, many other jurisdictions are waving carrots at high net worth clients. Italy, Portugal, Cyprus and Malta are all EU member states seemingly making a land grab for post-Brexit wealth. Even France is unravelling the failed socialist policies of Monsieur Hollande.
Old hands like Switzerland and Monaco are always likely to accommodate such people.
Even so, I would urge non doms with itchy feet to think again before they swap these shores for other jurisdictions.
After all, the same non dom tax system which is being slowly taken apart by the Government still has plenty of remaining attractions.
Non-doms remain free to dip in and out of the ‘remittance basis’ prior to the 15 year long stop date. Whether one pays the charge is a cost / benefit test that is calculated on a year by year basis.
Before they risk becoming ‘deemed domiciled’ for tax purposes, they can still establish the excluded property structures referred to above and these remain effective other than for residential property. Any other assets can be wrapped in such a structure ensuring that these assets are held outside of the UK IHT net in perpetuity… or until the Government changes the rules again (it is perhaps this flux which is the real issue!?)
One key exception from the remittance basis is Business Investment Relief. A non dom on the remittance basis can bring foreign income and gains to the UK without charge as long as there is an investment in a UK commercial property (including UK property development and investment). This relief is very attractive.
For those who have fallen off the precipice and are now deemed domiciled for tax purposes then, in the absence of any softening, their overseas trust structures would be ravaged by anti-avoidance rules.
Some, of course, might say ‘great news!’
However, transitional provisions known as ‘protected trust reliefs’, broadly prevent such tax charges accruing unless a benefit is taken from the trust (unless they add to their trusts whilst deemed domiciled). This essentially provides for such trusts to benefit from a gross roll up of income and gains even where the Trustees invest in the UK.
Non Dom Tax – Conclusion
All in all, in my view, things don’t look too bad on the non dom tax front. Non-doms are still very much sitting in fiscal business class.
Admittedly, life in the UK has its uncertainties, most topically of which is the possible fall-out from the UK’s withdrawal from the EU.
However, there are still plenty of reasons why those fortunate or hard-working enough to be among the ranks of the very wealthy should be happy to live here…
… If they can put up with the weather, of course.
If you or your clients need help with tax issues relating to non dom and non resident tax or indeed if there are any other tax issues that you feel we may be able to help you with, please contact us at email@example.com or on 01925 363006. You can also read more about non dom tax below.