On 12 March 2008 Mr Darling confirmed the implementation of the non domicile tax reforms. A non UK domicile individual will now only have the privilege of paying tax on the income that they bring into the UK known as the “remittance basis”, if they are prepared to fork out an annual fixed tax charge of £30,000. Should they fail to trump up this sum annually they will now be forced to pay tax on their worldwide income and gains.
The £30,000 Annual Charge
The pre budget report announced that the £30,000 annual charge will apply to those resident in the UK for more than seven years. It was later announced that taxpayers using the remittance basis will now not be required to make any additional disclosures about their income and gains arising abroad. So as long as they continue to pay the annual charge they will not be required to disclose information on the source of these remittances.
We are told that the £30,000 charge should be creditable against foreign tax however no official confirmation has been received form the US, and other jurisdictions confirming this. It was also confirmed that children will not pay the £30,000 charge, but that this will only apply to adults.
Those paying the £30,000 annual charge will no longer be entitled to the personal allowance that is afforded to UK citizens, currently standing at £5,225, unless their overseas income is less than the £2,000 threshold. In addition non domicile individuals with unremitted offshore income and gains of under £2,000 will be exempt from the £30,000 charge.
The Treatment of Offshore Trusts
It was further confirmed that that they will be no retrospection in the treatment of offshore trusts and that the tax changes will not apply to gains accrued or realised prior to these tax reform changes coming into effect.
The 2008 Budget on 12 March 2008 clarified that income and gains in offshore trusts will only be taxed when remitted to the UK, even if these come from UK assets.
Effect on Foreign and UK Investments
Since there are a significant number of UK non domicile individuals who will be unable to afford the £30,000 annual tax charge, they will now have to think twice before investing their funds abroad.
The UK non domicile individual had the advantage of investing their UK savings and UK taxed income in tax havens such as Dubai, where properties would pay rental income and capital gains free of tax. As long as these individuals did not bring these funds to UK, this income could be enjoyed free of tax and spent outside UK.
Following the introduction of this tax charge on 6 April 2008, the UK non domicile will now be hesitant to invest abroad as it would no longer be advantageous from a tax point of view when assessing such investments. Such individuals may now look to keep their funds in the UK and could contribute to the revival of the UK property market, where the tax treatment would be on a level playing field between UK and worldwide investments.
It could also be projected that the demand for foreign currencies required to make property purchases abroad would be reduced by non domicile individuals who may now look to make more home grown investments. This however could be limited by the larger investments undertaken by the wealthier UK non domiciles’ who pay the £30,000 annual charge and still benefit from paying tax only on remitted funds.
Non Domiciles and Businesses Exiting the UK
There is much talk about non domiciles and foreign business exiting the UK after the introduction of these non domicile reforms. London became a refuge for the super rich with approximately 115,000 people having “non-dom” status. The majority of these people came from the US, Germany, Switzerland and France.
Jeremy Penn, chief executive of the Baltic Exchange said such changes will inevitably lead to more international shipping companies moving out of the UK and therefore less business for UK maritime service providers such as shipbrokers, lawyers, insurers and financiers.
The Telegraph stated that Greek merchants who have made London their home have already warned that they are considering leaving.
The wealthy are seriously considering leaving London as a base. A poll undertaken by Grant Thornton
reported that 42% of rich Indians, Pakistanis, Sri Lankans and Bangladeshis with “non-dom” status are preparing to leave, however only 50 were actually asked, which may not represent a large enough sample to make a true extrapolation.
The Society of Trust and Estate Practitioners estimated that a third of non domicile individuals will leave the country. They state that the money gained from the £30,000 annual tax charge will be cancelled out by the loss in taxes these non domicile’s paid on their UK income. Wealthy foreigners invest as much as £125 billion in the UK and pay £7.16 billion according to the group.
The government may also not appreciate that should these wealthy individual leave the UK on a permanent basis, not only will the annual £30,000 tax charge be lost, but also the tax that was already being paid on the remitted income as well as UK generated income.
By such individuals leaving the UK they may well qualify as non UK residents and therefore be relieved from further taxes such as capital gains tax if they remain non-resident for five or more years, as well tax on higher rate dividend if they remain outside UK for one full tax year.
For the super rich such as oil tycoon Mr Roman Abramovich the annual charge will not make much difference and such a reform is unlikely to alter the behaviour of such individuals. However the combined effect of the less well off non domiciles could have a significant effect.
This was clearly not a well thought of reform and we will see the repercussions of these changes many years in to the future. The effect of such tax introductions will certainly not help the already very fragile and volatile UK economy that currently needs all the help it can get rather than such ill thought off tax raising strategies.