Non-domicile tax breaks have made Britain jammy for dodgers – but for how much longer, asks Caroline Garnham
London’s new-found status as the world’s most successful financial city is thought to be based in part on the exemptions and reliefs available to the UK-resident non-UK domiciliaries.
Gordon Brown in his ten years as Chancellor has gone to great lengths to ensure that none of the reliefs and exemptions for non-UK domiciliaries have been amended or restricted in any way. The UK is therefore still a tax haven. Non-UK domiciliaries can live in the UK paying tax only on the income and gains made in the UK or brought into the UK. There is also an exemption from inheritance tax on all non-UK assets for the first seventeen years of residence or forever, if such assets have been transferred into an offshore trust before this date.
However, as a result of a series of court cases the tax freedom so carefully preserved by Gordon Brown for non-UK domiciliaries has now become uncertain. Court orders have been issued requiring banks to release information to Her Majesty’s Revenue and Customs (HMRC) regarding UK residents with offshore bank accounts. This produced a wealth of information not only on UK domiciliaries evading tax, but also about non-UK domiciliaries and their offshore bank accounts.
Although reliefs and exemptions for non-UK domiciliaries are well understood, they rely on rigorous efficiency in the management of investments and bank accounts to ensure that no monies brought into the UK or enjoyed in the UK are in fact either taxable income or capital gains. To live in the UK tax-free it is essential to bring in only capital untainted with either income or capital gains. Separate accounts must therefore be kept and no mistakes made concerning from which accounts investments are made and into which accounts disposal proceeds deposited.
Many non-UK domiciliaries, not fully conversant with the detail of the rules, have over the years become complacent in the administration of their accounts on the understanding that they would not come to the attention of HMRC. This is not now the case. HMRC can bypass the taxpayer and go straight to the banks for this information. Uncertainty has now crept in as to how much tax is payable, together with a genuine fear of a tax investigation.
But, the information available to HMRC is voluminous. To investigate the source of funds in the accounts of a non-UK domiciliary is an onerous and expensive exercise.
An approach is required which provides certainty and fairness at the same time as preserving the attractiveness of London for those contributing to its success. Let us assume, therefore, that the Treasury has the following wishes to keep in the UK all non-UK domiciliaries who generate value and business here; to reduce the administrative burden on HMRC and the non-UK domiciliary trying to take advantage of these exemptions and reliefs; to protect our property market, which could collapse if the non-UK domiciliaries were to sell up; and to avoid prolonged periods of uncertainty. Accordingly, it should consider a solution to address these objectives.
There are several ways in which these goals could be achieved. For example, all non-UK domiciliaries will need to elect in order to obtain the reliefs and exemptions available for non-UK domiciliaries. (This is not new.) Those who do not elect will be chargeable to tax as a UK domiciliary. (Again, this is also not new.) All non-UK domiciliaries will be charged to tax on all remittances to the UK, regardless of source and regardless of whether they are income or capital, from a foreign investment, employment or trust. All non-UK domiciliaries who are UK-resident should pay tax on future capital gains arising in the UK as from the date on which the law is introduced. Finally, the seventeen-out-of-20-year rule for inheritance tax should be scrapped on the basis that it is arbitrary and easy to avoid, with no incidental benefit to the Treasury.
The advantages of these reforms would be considerable. All the non-UK domiciliaries who are generating income in the UK to meet their requirements, in the UK, would elect to keep their non-UK domicile tax status because they have sufficient taxed income in the UK on which to live.
It would be fair for the non-UK domiciliaries who do not generate wealth in the UK, to pay tax on what they need to live on here, whether this comes from capital or income. It is then a matter for each person to decide whether, given their own personal circumstances, they wish to elect for non-UK domicile tax status or not.
Also, it would be fair for tax to be paid on capital growth of assets in the UK for those resident in the UK. However, it would be clearly unfair to tax growth at a time when it was understood that the gain was tax exempt. A rebasing or time apportionment would therefore be necessary. This would also have the effect of preserving the UK property and equity market, while at the same time taking some of the heat out of it.