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Expat Briefing Editorial Team
02 December, 2016
"Non-domiciled" tax status in the United Kingdom has been under attack for a number years by governments of various shades. And the current administration is no exception after it was confirmed in the recently announced Autumn Statement that plans to reduce the scope of the non-dom rules will go ahead.
What's A Non-Dom?
The whole area of UK tax residence is a legal minefield which has been subject to differing interpretations by the Government and the court down the years. Thus, it is not always easy to define who is resident in Britain for tax purposes and who isn't. But, very broadly speaking, UK residents who have their permanent home ('domicile') outside the UK are considered to be non-domiciled, and therefore may not have to pay UK tax on foreign income if that income remains abroad.
To complicate matters, an individual's domicile may also depend on where their father was born. As a government guide to tax on foreign income explains: "Your domicile's usually the country your father considered his permanent home when you were born. It may have changed if you moved abroad and you don't intend to return."
So, in summary, individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains. Non-doms on the other hand can claim the remittance basis of taxation, which does not tax foreign income and gains as long as they are not brought ('remitted') to the UK. However, they must pay for the privilege, as explained below.
Remittance Basis Charge
A remittance-based charge (the "non-dom levy") is charged at GBP30,000 (USD37,680) for those resident in the UK for seven of the past nine years, GBP60,000 for those UK resident for 12 of the last 14 years, and GBP90,000 for those who have been UK resident for 17 of the last 20 years. The levy was first introduced in 2008, and the GBP90,000 charge was introduced at the 2014 Autumn Statement.
The Government is taking forward plans, first announced in 2015 and consulted on earlier this year, to end the permanency of non-dom status. Thus, from April 2017, non-domiciled individuals will be deemed UK-domiciled for tax purposes if they have been UK resident for 15 of the past 20 years, or if they were born in the UK with a UK domicile of origin.
As previously announced, non-domiciled individuals who have a non-UK resident trust set up before they become deemed-domiciled in the UK will not be taxed on income and gains arising outside the UK and retained in the trust.
The changes will also have an impact for inheritance tax purposes. So, from April 2017, inheritance tax will be charged on UK residential property when it is held indirectly by a non-domiciled individual through an offshore structure, such as a company or a trust. According to the government, "this closes a loophole that has been used by non-domiciled individuals to avoid paying inheritance tax on their UK residential property."
However, the government intends to change the rules for the Business Investment Relief scheme from April 2017 to make it easier for non-domiciled individuals who are taxed on the remittance basis to bring offshore money into the UK for the purpose of investing in UK businesses. The government will continue to consider further improvements to the rules for the scheme to attract more capital investment in British businesses by non-domiciled individuals.
Reasons For Change
Critics of these tax rules contend that they are anachronistic and unfair, allowing a wealthy elite to avoid large sums in tax. And the Government is clearly very conscious that the tax regime is seen to be fair. Thus, upon presenting the Autumn Statement – a sort of supplementary annual budget – on November 23, 2016, Chancellor of the Exchequer Philip Hammond said that the changes are intended to "make the tax system fairer."
"Reforms to the taxation of non-domiciled individuals – Individuals who live in the UK and make use of public services should pay their fair share of tax," he added.
Warnings Against Change
Others argue that they have helped to encourage foreign business owners and entrepreneurs to invest heavily into the UK. It is also argued that non-doms still contribute substantially to the UK Government's coffers.
According to international law firm Pinsent Masons, UK-based non-doms contributed GBP6.57bn in income tax in 2014-15. It explained that this figure represents an average of GBP56,589 per non-dom over the year, compared with an average of GBP5,152 per individual within the general population.
Pinsent Masons tax investigation expert Fiona Fernie said: "Non-doms make a highly valuable contribution to the UK economy and any substantial exodus could have serious long-term impacts. Policymakers need to consider what they might lose by placing the status under threat."
The total number of UK taxpayers indicating a non-domiciled status on their tax return was 116,100 in 2014-15, up two percent from the previous year. Pinsent Masons said that 5,000 non-doms paid a total of GBP223m through the remittance-basis charge in 2014-15, the same sum as was collected in 2013-14.
"The availability of non-dom status gives the UK a real competitive advantage when it comes to attracting wealthy and talented individuals. Removing or altering it now, especially in the wake of uncertainty generated by Brexit, will cause many to look seriously at relocating," Fernie warned.
"Many non-doms are internationally mobile and will not hesitate to move if the grass looks greener. Dismantling the tax status will do little to keep them here in the UK," she added.
Forewarned Is Forearmed
Irrespective of the arguments for and against the non-dom tax rules, it seems clear that the Government is going ahead with its proposed changes. Therefore, taxpayers likely to be affected by the new rules should take appropriate tax advice and plan their tax affairs accordingly to mitigate their impact.
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