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  1. Law
November 3, 2011

Proposed Tax Relief for Non-Doms

By Spear's

Phew! That’s a Relief
Proposed laws that will limit the tax liabilities of non-doms are a welcome development. More, please, says Caroline Garnham

HM TREASURY HAS proposed a welcome new relief for UK residents who are non-UK-domiciled. It is proposed that remittance of income and gains made abroad are to be tax-free if invested and kept in companies operating in the UK (subject to certain criteria and avoidance provisions). There is no upper or lower limit imposed on the remittance and it is not limited to investment in UK companies. It includes investment in non-UK companies that have a permanent establishment in the UK but carry out trade outside the UK. Listed companies and those quoted on exchange-regulated markets could also be included, pending the outcome of the consultation. Property holding companies are excluded, but property development companies are included.

Where I suggest the reliefs do not go far enough is that currently any income or gains made on this investment if arising in the UK are chargeable to UK taxation, whereas if they were made abroad they would not be chargeable to tax. I would like to suggest that, provided and to the extent that any income or gains arising on the investment in the UK are re-invested in such companies, they should not be chargeable to either income tax or capital gains tax. If, however, there is not the political appetite to extend this relief to all income and gains arising from these investments, it could at least be extended to investments into small and medium enterprises for which funding remains hard to find.

The consultation period for feedback ended on 9 September. The opinions of many learned bodies such as the Chartered Institute of Taxation and the Society of Trust and Estate Practitioners were put forward. However, the voice of the taxpayer was not heard. Although the deadline has passed, HMRC has expressed great interest in hearing feedback from you.

UK ‘residence’ is largely determined by how much time you spend in the UK. As my column in the last edition of Spear’s explained, in future this will be determined by a statutory test, which is affected by whether you are arriving or leaving.

‘Domicile’, however, is determined not by time spent in the UK, but whether the UK is your ‘home’ country. In essence your home country is your father’s home country at the time of your birth. Until the age of sixteen your ‘home’ country tracks your father’s. Thereafter you can adopt another home country depending on numerous factors.

For example, if you were born in Brazil and your father at the time of your birth was working in Brazil but returned to his home country of Portugal when you were two, you are likely to have a domicile of origin in Portugal. If, then, your mother, who’s English, took you to live in England at the age of twelve and since then you have never returned to Portugal and have not lived elsewhere, and if all your friends, family and clubs are in the UK, you may well have acquired a domicile of choice at the age of sixteen in the UK.

To be eligible for this relief you have to elect for it, and if you have been resident in the UK for seven of the preceding nine tax years you need to pay an annual fee of £30,000. It is now proposed that this will rise to £50,000 if you have been resident in the UK for twelve of the preceding fourteen tax years. Of course, for someone who has £2 million invested abroad the advantage of this relief is going to be significantly less than for someone with £100 million invested abroad.

You may think that the taxation of UK residents who are non-domiciled is an odd relief. It operates to attract the wealthy foreigner to the UK, but not his wealth! Surely the UK should welcome not only wealthy foreigners but their wealth as well?

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In Switzerland, not only is the wealthy foreigner incentivised to live in Switzerland if eligible for the forfait arrangement, but his wealth is welcome too. However, the relief for non-UK domiciliaries was not planned — it happened by default. All UK residents were once taxed on their foreign income and gains on the remittance basis. This was changed to the arising basis for foreign income and gains, but only for UK domiciliaries. Taxation for non-UK domiciliaries was never thought through as an incentive to attract them to the UK, and it has only been used as such as people and money have became more mobile.

The new proposals are the first of what I hope will be many steps to attract not only the wealthy to the UK but also their wealth. What do you think? 
Illustration by Jeremy Leasor

Caroline Garnham is a partner in Private Capital at Lawrence Graham

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