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  1. Wealth
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March 16, 2016updated 01 Aug 2016 4:47pm

What Zac Goldsmith’s non-dom status row can teach us about offshore gains

By Spear's

Mark Davies on why the Tories’ London mayoral candidate is making front pages for all the wrong reasons.

The Conservative mayoral candidate, Zac Goldsmith, has been forced to reveal details of his tax affairs after he came under fire from opposing MPs regarding the potential advantages his domicile status had on his tax bill. We understand that prior to 2009 Goldsmith declared himself to be a foreign domiciliary or a ‘non-dom’.

Everybody inherits their domicile of origin from their father and Zac Goldsmith would have inherited his non-UK domiciled status from his father, James Goldsmith, who died in 1997. James Goldsmith was a French-domiciled billionaire financier who established an overseas trust for the benefit of his children prior to his death. The location of the trust and Zac’s status as a non-dom were catalysts for press interest.

As a UK resident non-dom, Goldsmith had the option of claiming to be taxed on a ‘remittance basis’ in the UK, whereby he would only be liable to UK tax on his UK source income and gains during a tax year, with any non-UK income (such as offshore trust income) and gains being sheltered from UK tax, provided that they were not remitted to the UK.

Goldsmith was challenged by the Labour Party to publish his tax returns, presumably in an attempt to show that he had benefited from the UK tax regime for non-doms. However, following the disclosure of his 2010-11 to 2014-15 tax returns, Goldsmith has not silenced the opposition. This is despite his returns showing that he paid an average rate of income tax of 46 per cent over five years. Instead, they triggered more questions. However, this is to be expected as Goldsmith has only released tax figures relating to the period after which he relinquished his non-dom status, despite his claim that he never derived any tax advantage from being a non-dom.

The returns show that Goldsmith received an average annual income of £1.2 million over the last five years, which largely derived from the offshore trust settled by his father. It is also evident that he received immaterial interest income and realised substantial gains, although how these were sourced has not been revealed. Gains made by an offshore trust can become taxable for beneficiaries where it can be matched to a beneficiary receiving a benefit or capital payment from the trust. As Goldsmith and his family live in trust-owned properties, perhaps the gains relate to the benefit of rent-free accommodation.

The omission of the tax returns for tax years prior to 2010 begs the question, was Goldsmith taking full advantage of the attractive non-dom regime in earlier years?

This question cannot be answered without knowing the facts. To have claimed non-dom status Goldsmith must have believed that the UK was not his permanent home.

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Secondly, is Goldsmith paying less tax now in consequence of the tax planning put in place by his father?

This question is easier to answer. The trust structure has enabled Goldsmith to have the economic benefit of his inheritance without the requirement to pay inheritance tax. But it is perfectly legitimate for anyone to arrange their affairs to pay the least amount of tax following the Duke of Westminster’s case in 1936. If this were not so, we would all be penalised every time we choose to put money into an ISA or pension instead of investing in some other taxable medium. It should also be noted that it was James Goldsmith’s choice to set up a trust and not Zac Goldsmith’s.

Zac Goldsmith is taxable on distributions made, or benefits received, from the trust. This would be so whether he was domiciled in the UK or a non-dom. But as a non-dom he would have had the option to have the distribution made abroad or received abroad and could have avoided tax if he had claimed the remittance basis and paid the remittance basis charge. However, even now, tax could still be avoided if Goldsmith can decide whether to request a distribution or not. This seems to be the case as he confirmed ‘what I do have control over is the income I get’.

In the summer 2015 Budget the government announced a series of proposed reforms to the taxation of non-doms. In February, draft legislation was released defining a ‘deemed-domiciliary’, which is expected to come into effect from 6 April 2017.

A deemed-domiciliary is a person who was born in the UK with a UK domicile of origin who obtains a domicile of choice elsewhere and then subsequently returns to the UK; or who has a foreign domicile and who has lived in the UK for more than fifteen out of the previous twenty tax years.

Such persons will be required to pay taxes in the UK on their personal worldwide income and gains, and the remittance basis will not be available.

The government has revealed that there will be protective legislation for non-doms with foreign domicile of origin who set up offshore trusts prior to becoming deemed-domiciled. It is intended that these deemed-domiciliaries will be taxed on the value of the benefits received by them, not the income and gains arising in the trust. This becomes an attractive measure for individuals who want to accrue wealth offshore.

However, there is still some uncertainty as draft legislation on the taxation of trusts has not been released and is not expected to be seen until Finance Bill 2017.

The government has certainly cracked down on the non-dom regime since the election, when this regime was at the forefront of Labour’s manifesto, but it knows that caution needs to be exercised in order to retain the wealthy non-doms who contribute over £4 billion in tax to the UK’s economy.

Mark Davies is the managing director of Mark Davies & Associates

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