The 2008-09 tax year is drawing to a close. As it does, Britain’s estimated 114,000 non-domicile residents are preparing to bid adios, arrivederci, 再見, au revoir, до свидания, auf wiedersehen and happy trails to one of the developed world’s most benign taxation environments for long-term resident foreigners with offshore income.
Until last April, foreigners who lived in the UK but maintained their so-called ‘non-dom’ status were able to avoid paying income tax on all offshore earnings and capital gains, as long as they didn’t bring the money into the UK. If they did, then it would be taxed as income – 40% if they were in the higher rate band.
But now, beginning with the tax year ending on 5 April, non-doms who have been living in the UK for seven years or longer either must pay basic UK income tax on all monies earned overseas, or pay a £30,000 ‘remittance fee’ in lieu of being taxed on those offshore earnings. Those whose un-remitted foreign income or gains are below £2,000 are exempted.
Lifestyle choice
Financial advisers say this change has made the UK significantly less attractive than it was as a place for non-doms to stay longer than seven years. But contrary to what some had been warning, a stampede for the exits so far has not materialised.
For one thing, the significantly weaker pound has made Britain comparatively cheaper for Europeans and Americans than it was a year ago, says Joshua Matthews, a partner at London-based Maseco Financial, which specialises in advising US non-doms. Another reason they are staying put, he notes, is that this is where their jobs are – which is not the case for many offshore tax havens.
Matthews’s partner at Maseco, James Sellon, adds: “Most of the non-dom individuals you meet are motivated by the lifestyle they want to lead, rather than just maximising their after-tax dollars. You do get some people who move from place to place globally in pursuit of higher income, but that’s at the margin.”
Sellon and other experts note that by changing the way it treats non-domiciled long-term residents, the UK is falling more in line with other major countries popular with wealthy expatriates, which typically give brief ‘tax holidays’ to newcomers but expect long-term residents to contribute as though they were nationals.
James Quarmby, a partner and tax expert at law firm Thomas Eggar, says that although the UK is now less attractive for long-term ex-pats, it remains appealing for those prepared to stay for seven years or less, and also enjoys a competitive advantage over some rival jurisdictions, including Switzerland, in not having a wealth tax – a tax based on an individual’s net assets rather than his or her income.
A modest number
Her Majesty’s Revenue & Customs (HMRC) says it expects only about 4,000 people to pay the £30,000 fee this year – roughly 3.5% of the 114,000 who identified themselves as non-doms for tax purposes on self assessment tax returns in the most recent period for which HMRC has data. This will directly net the Government a relatively modest £120m in new revenue.
Unsurprising figures
However, the benefits to the Treasury will also include the taxes now being paid for the first time by some – no one seems yet to know quite how many – of the 110,000 who previously identified themselves as non-doms, as their offshore earnings attract the same tax rate as those of their UK-domiciled counterparts.
Advisers say they are not surprised that so few non-doms – or “in-pats”, as some refer to them – are expected to pay the remittance fee. For a start, relatively few of those declaring themselves non-doms have actually lived in the UK seven years or longer, they note.
Also, particularly since interest rates have fallen sharply since the plan to tax non-doms on their offshore earnings was proposed 17 months ago, the remittance fee only makes sense for those with a good-sized offshore nest-egg.
To make paying the remittance fee worthwhile, an individual now would need offshore assets of at least £7.5m, producing income – with interest rates now at 1% – of £75,000, advisers point out.
Opting to pay the tax
Even then it could make more sense to pay the tax instead, says Quarmby. “You really need offshore income of about £200,000 to even consider paying the remittance fee,” he explains. “To get that kind of an offshore income, you are looking at offshore savings of £4m to £5m.”
A non-domiciled UK resident who intends to bring any of his or her offshore money into the UK during the year would automatically trigger the usual 40% tax on the funds brought in even if they had paid the remittance fee – but not if they had already paid tax on it, Quarmby points out.
Another disincentive for choosing the remittance fee is that married non-doms must pay twice as much, or £60,000, to shelter their offshore earnings. That said, some are opting for a combination of the two options, according to advisers, with one partner declaring most of the couple’s income and assets and paying the fee; and the other partner, typically a stay-at-home or part time-working wife, paying UK taxes.
US non-doms, meanwhile, face a unique set of problems, particularly as it is still not yet clear whether the £30,000 remittance fee will be either partially or totally offsetable against their US tax obligations, according to Sellon. Before the UK decided it wanted a slice of the action, such UK-resident US citizens have been obliged to pay US taxes on all their offshore income and gains.
According to the US Embassy, there are some 250,000 US citizens living full time in the UK. The UK’s Office for National Statistics, meanwhile, counts some 178,000 UK residents who were born in the US.
Playing fair
Richard Leeson, head of sales and marketing at Prudential International, explains: “There is an argument that people who have lived here longer than 20 years are effectively making Britain their home, and therefore should be paying tax as any other UK-domiciled person does.”
At the same time, “over the last five to 10 years there has also been a gradual recognition, by the G-20 countries at least, that tax competition is not really desirable,” adds Prudential International’s head of tax and trusts, Gerry Brown, who points as evidence of this change to the increasingly forceful role the Organisation for Economic Co-operation and Development (OECD) is playing in trying to pressure so-called tax havens into becoming
more transparent.
In the US, Barack Obama has been an outspoken critic of tax havens for years as a senator, and reiterated his concerns during his campaign for president.
Over time, such pressure “is going to stop or at least reduce the use of taxation as a weapon to attract wealthy individuals, industry and commerce” from other jurisdictions, Brown believes.
The downside
Quarmby, meanwhile, thinks the harsher treatment of UK non-doms after seven years, rather than being fairer, actually “discourages a long-term commitment with the country”, by punishing those whose spending and investment means they contribute a disproportionate share to the country’s tax base.
It also risks driving desirable individuals into the eager arms of other jurisdictions “that have been saying ‘come to us, we have got a proper remittance basis’,” he says. “In my experience with non-doms, those that come here for the longer term tend to invest more, buy more, and employ more people.”
