Tax tease: The number of non-doms left in the UK

The press are making much of a disclosure by HMRC about the number of people registered as non-doms in the UK. Some reports suggest that 16,000 wealthy non-doms have fled the UK.

The FT's headline, as you might expect is more accurate, suggesting that ‘Non-dom’ numbers fall in wake of levy'. However the article also reveals the figures for 3 years:

• 2006/07 -117,000
• 2007/08 - 139,000
• 2008/09 - 123,000

Notice that overall this isn't a fall in the numbers.

It's also worth noting that, contrary to some reports, the figures do not represent 'the number of wealthy foreigners' who live in the UK. HMRC's figures are simply of those people who have ticked a specific box on their tax return each year. And many of them will be second or third generation immigrants who can technically claim non-dom status despite having no great wealth or assets outside of the UK. They might just be hedging their bets.

Anyway, the guidance as regards ticking the 'non-dom' box changed in 2008/09 so many people who ticked it in 2007/08 no longer had to tick it in 2008/09.

I doubt that they all left the country. And, in any event, by my reckoning there were 6,000 more non-doms here in 2008/09 than there were two years previously. Another two years have since passed. I wonder how many are here now?

Is permanent residence different to domicile?

Back in March 2000, Lord Ashcroft undertook:

"to take up permanent residence in the UK again before the end of this calendar year."

Many people assumed this meant that he would cease to retain his non dom status. In fact as all half decent tax advisers will tell you there is an enormous difference between the concepts of residence and domicile. Even a 'permanent' resident can, if not currently domiciled here, retain their non dom status. This is because that status is dependent on a number of other factors including where they anticipate ending their days.

Lord Ashcroft's advisers will have been well aware of the ambiguity of his statement and that he could retain his non-dom status whilst also being "fully tax resident" in the UK. He will have been liable to UK tax on all UK 'source' income, such as from property, jobs and investments held in the UK. Non-dom status allows income and gains that arise outside of the UK to escape UK tax unless the money is 'remitted' to the UK.

As regards his future intentions, Lord Ashcroft has chosen his words very carefully. He says:

As for the future, while the non-dom status will continue for many people in business or public life, David Cameron has said that anyone sitting in the legislature - Lords or Commons - must be treated as resident and domiciled in the UK for tax purposes. I agree with this change and expect to be sitting in the House of Lords for many years to come.

I suspect that this is intended to enable him to avoid losing his non dom status until 6 April 2010.

When the issue of non doms was last discussed in the context of Zac Goldsmith I expressed the view that he had fallen into a trap. As noted in the comments on that blog post, Mr Goldsmith's subsequent comments confirmed the veracity of my observation. It is for the same reason that Lord Ashcroft is unable to confirm explicitly that he intends to cease being a non dom or that he has already done so.

Non dom MPs - how difficult is it to change the law?

Top Tory donor and party chairman Lord Ashcroft has revealed he is still a "non-dom" but says he will at last give up that status. Leaving aside all the political mud-slinging about the timing of Lord Ashcroft's announcement I was intrigued by something I heard Justice Secretary Jack Straw say on the subject.

He was being interviewed on Channel 4 news about the change in the law required to ensure that all donors to political parties are domiciled in the UK. Mr Straw noted that the law had been changed a few years ago to ensure that all donors were registered UK voters. A further change is now required to ensure that they are domiciled here (or as Jon Snow repeatedly put it, rather simplistically, "paying full UK taxes").

Mr Straw blamed the delay on changing the law on HMRC as "the law [of domicile] is very complicated."

I'm sorry? The complexities of the law of domicile are an issue as between individual taxpayers and HMRC. Such complexities are irrelevant when framing an amendment to the law to deny political donations from non-doms. Indeed such a change would put the onus on donors to clarify their domicile status.

I note that a similar issue arises as regards a rushed amendment to the Constitutional Reform and Governance Bill. This will deem MPs and peers 'ordinarily resident and domiciled in the UK' for income tax, capital gains and inheritance tax. However it is reported that Peers would have three months from the change coming into force to ensure their status was in line with the new rules. If true this can only mean that they have 3 months to confirm their tax status from the beginning of the relevant tax year - if they were not ordinarily resident or non-doms in the previous tax year.

When did or will Zac Goldsmith cease to be a non-dom?

It's been revealed that Zac Goldsmith has been claiming that he is not domiciled in the UK for tax purposes. Zac is the green adviser to David Cameron and a prospective Tory MP for Richmond Park.

Non UK domiciled taxpayers are not required to pay UK income tax on income that arises overseas as long as it is not remitted to or enjoyed in the UK. If they are resident here non-doms are fully taxable on their UK source income. As of last year any UK residents who claim the tax benefits of being non-doms are liable to pay an annual £30,000 charge in lieu of the tax on their overseas income.

The article in the Sunday Times contains extensive reference to trust assets made available to Zac as a result of late father's largess. What the article doesn't do however is to explain the justification for Zac's (admission that he) claims to be domiciled outside of the UK.

His status would seem to be derived from his father's non-dom status at the time that Zac was born. This is commonly the case and would mean that Zac has a domicile of origin in a specific overseas country. However this is not the end of the story. Zac has spent most of his life in the UK. So he might be thought to have established a domicile of choice here - and thus have forsaken his non-dom status. Indeed a spokesman is reported to have stated that Zac:

"has already taken the decision to relinquish his non-domicile status.”

I'm sorry? Either he has established a domicile of choice here or he hasn't. As HMRC's own guidance says in HMRC 6:

Broadly, to acquire a domicile of choice you must leave your current country of domicile and settle in another country.

The booklet goes onto confirm that it's a lot more complex than this and there are a series of useful flowcharts (on pages 25-28) that are intended to help people understand their domicile status. I fear that Zac has already established a domicile of choice in England.

I hope he has already filed his 2008/09 tax return. Otherwise he will be hard pushed to claim non-dom status on it if he has already decided to accept that he is domiciled here in future. Indeed HMRC could question the legitimacy of the claim on previous tax returns as there has to be a date from which someone's circumstances change and from which they are to be treated as domiciled here. Would that have been the date on which he was elected as the local Conservative Parliamentary candidate in March 2007?

Lesson? Tax rules are complex - never allow your spokesman to make statements that could impact your tax position unless they understand the implications of what they are saying and this accords with the facts.

Non Doms set to leave the UK - so what's new?

A number of papers (eg: Sunday Times) have picked up on reports that KPMG research reveals that that 1 in 4 non-doms are planning to leave the UK because they don't like the new tax regime for non-doms that was introduced last year.

The fact that 76% of the 80 non doms who responded to the survey are NOT planning to leave the UK imminently suggests to me that the new rules are better targetted than many have previously suggested. That's not to say the rules are well thought through or easy to operate. Some tweaking is required to make them workable without the continued need for HMRC discretion.

And it also seems clear from KPMG's report that the primary motivation for many non-doms returning home is that they have lost their jobs or that the business opportunity that brought them here has disappeared. The new tax regime is not the key reason.

One has to wonder however what question KPMG asked of these non-doms. After all, BY DEFINITION all non-doms are intending to leave the UK at some stage - otherwise they would have become UK domiciled. And this is recognised in KPMG's press release which notes that: "Non-UK domiciled individuals are people whose homeland is abroad."

What is your experience?

IR 20 Residence and Domicile - a unique opportunity

This is a first (I think). HMRC are seeking input from anyone and everyone to assist them in updating their IR20 guidance. During my long time involvement with the ICAEW Tax Faculty I have contributed to many, many representations and responses to consultations documents. Whilst these are invariably published on HMRC website it is rare (if not unprecedented) for HMRC to openly seek input to an update of their guidance. It's a good move and one I applaud.

When I used to be in practice IR20 was effectively the 'bible' to which one referred when advising clients on the tax consequences of almost any residence related issue.

In normal circumstances we would all have treated IR20 the same as any other HMRC guidance. That is, simply as a statement of their views. But the guidance amplified the legislation and indicated a pragmatic approach by HMRC that provided a greater degree of certainty as regards how they would apply the law. It was invaluable.

All this changed however when HMRC argued against their own guidance in the Gaines Cooper case. They won before the Commissioners and at the High Court. Subsequently the Government changed certain aspects of the law concerning residence and domicile. The profession has since been waiting to see an updated version of IR20. It is evidently out of date in many respects now but apparently will not be formally withdrawn until next March when the new guidance should become available.

So if you have any clients affected by the tax laws related to residence and/or domicile you may care to identify the key issues which currently prevent you from providing definitive advice. Equally you may want to obtain specialist advice on such matters, in which case I do hope you will speak to one of the members of the Tax Advice Network. (You can use the 'search' facility - top right of this page - to access relevant profiles and then make your choice using whatever criteria are right for you).

Where to establish your offshore property investment company

This is a follow up to yesterday's post in which I set out the 'myth' of investing in property overseas using an overseas company.

Recently I was asked in which overseas tax haven should someone base their company if, despite the views I shared yesterday, they were comfortable with the idea.

Here's how I replied:

1 - As I said in yesterday's post - I don't give tax advice any more.

2 - Tax avoidance (the legal approach ) as opposed to tax evasion (illegal) is not that straight forward. Anyone who indicates an immediate willingness to provide a definitive answer to that question does not have a full understanding of the tax issues. And that includes many so called experts based in those tax havens.

3 - The answer will depend upon a number of factors including:

- Short term and long term plans,
- likely levels of rental income,
- whether you will want to extract that income,
- the extent to which you will be borrowing money to fund the property investments,
- how any interest will be paid,
- how long you are prepared to tie up your money,
- where you are domiciled (nb: this is a VERY different concept to where you are resident),
- where you plan to live in the future,
- whether you have been or will be resident in the UK for more than 7 years,
- your family circumstances now and any likely changes into the future,
- the local laws of inheritance in each of the countries in which you will own property,
- the amount you are prepared to invest in overseas tax structures (which will depend on the sums you will have invested in property overseas),
- the countries in which you will be investing and the double tax treaties they have with the tax havens in question,
- the terms you are prepared to have (or already have) in your will,

NB: That list is off the top of my head and not intended to be comprehensive.

It can be very short sighted to invest without first seeking out a good independent overseas tax planning expert (such as one of the relevant members of the Tax Advice Network) and paying for advice on a complex subject like this.

The alternative is to act on partial advice or hearsay and take a chance. In my experience people who do this ALWAYS regret it later. Sometimes within a couple of years - but normally five to ten years later.

Non doms and the £30,000 bung - who will actually pay this?

Hopefully all accountants with non-UK domiciled clients are aware of the announcements made in the Chancellor's pre-budget report last October. Few commentators seem to have appreciated that the objective is evidently NOT to secure payments of £30,000 but rather to force the disclosure of world-wide income and capital gains.

The £30,000 bung will only be an attractive option for the super-rich who would have to pay more than this in UK tax if they disclosed their world wide income.

What seems to be often overlooked is that UK tax will only be payable over and above any local taxes payable on offshore income and gains. Thus if the local taxes are 25% only a further 15% UK income tax would be payable here. If of course the income or gains are not being taxed overseas then the UK tax bill could be as high as 40%.

What levels of taxable income would warrant the payment of the £30,000 bung in preference to 40% tax? Well - An investment of £1.5 million generating a not very exciting return of 5% would yield £75,000. 40% of this = £30,000.

Remember too that if a taxpayer elects to pay the £30,000 this will mean that they will forgo their entitlement to a personal allowance and to the CGT annual allowance. These will no longer be available to anyone who wants to be taxed on the remittance basis (and who pays the £30,000 as a penalty for so electing).