"I want to preserve the non-dom status that makes our country attractive, but I want them to pay a fair contribution while having certainty about their future arrangements."
This was the Chancellor's opening statement yesterday before announcing further in-roads into non-dom status, which reduce the benefits attached to it. We set out the relevant changes, in context, below, together with our thoughts on how taxpayers might respond to this and how we might be able to help.
The principal benefit of being domiciled outside the UK is that one is thereby entitled to be taxed only on a territorial basis, i.e. in broad terms, the UK will seek to tax only those items which have a sufficient UK nexus. For income tax and capital gains tax purposes this translates into a basis of taxation known as the "remittance basis", which allows individuals, in broad terms, to pay tax only on income and capital gains made in the UK or brought to the UK from outside.
On 6 April 2008, a levy was introduced, requiring non-doms who had been resident in the UK for seven of the past nine tax years to pay £30,000 to access the remittance basis. Then, from 6 April 2012, non-doms who had been resident in the UK for 12 of the past 14 years were required to pay a higher charge of £50,000 for the privilege.
Following the Chancellor's announcement yesterday, non-doms who have been resident in the UK for 12 of the past 14 years will, from 6 April 2015, have to pay £60,000 to be taxed on the remittance basis and non-doms who have been resident for 17 of the past 20 years, will have to pay £90,000. Those who have been resident for seven of the past nine years, will still have to pay £30,000.
The introduction of a £30,000 charge initially caused non-doms to think twice about the financial benefits of claiming the remittance basis. In order to warrant a £30,000 outlay, one has, in order to make an overall saving, to have significant income and capital gains outside the UK which would thereby remain untaxed. This is an even sharper concern when one is considering the financial sense in paying a levy three times the size of that which was originally introduced.
The requirement to pay an annual levy had been mitigated by the ability, each tax year, to opt in and out of the remittance basis. If it was worth paying the charge one year, then the claim would be made. If it was not worth doing so the following year, the claim would not be made. This seemed a fair quid pro quo.
However, a more insidious announcement yesterday – not included in the Chancellor's speech but instead found lurking in the Autumn Statement documents – was that the Government is considering limiting this ability. The Government will consult on making the election to pay the remittance basis charge apply for a minimum of three years. So, if this change is introduced, one may have to commit, in year one, to a £270,000 outlay on the basis of an expected return over a three year period without a clue as to investment performance in year three (or in the latter part of year two).
This is a huge change because, at the moment, taxpayers prepare their tax returns after a tax year has ended and choose their reporting basis in light of their financial performance over that past year. It would be a rather odd requirement that taxpayers should carry out their tax reporting on the basis of imagined future performance and one hopes that, as such concerns emerge over the consultation period, the Government might re-think. At the moment, no details have been provided as to the start or end date of the consultation and no consultation document, containing any details of the proposal, has been published.
The first point to note is that it remains possible to claim the remittance basis without charge for the first six years in the UK.
Thereafter, the simplest response is to structure one's affairs so that one does not need to claim the remittance basis, or so that as few family members as possible need to do so. We had already noticed a growing interest in this before yesterday's changes and we predict that this will now grow further.
The sort of strategies one might adopt include:
- Keeping one's number of days in the UK at such a level that one does not become UK resident for tax purposes;
- Concentrating income and capital gains into the hands of one family member who alone claims the remittance basis;
- Investing in products which offer tax deferral during the period of UK residence; and/or
- Otherwise transferring assets to a separate holding vehicle (albeit this requires careful thought and may not always be suitable).
These are all strategies which may be pursued legitimately and in a manner which does not constitute "aggressive" tax avoidance. Interestingly, a need to adopt strategies which have as their goal avoiding the remittance basis would put non-doms on the same footing, in many respects, as those who are domiciled in the UK. In this respect at least, the Chancellor's avowed intent to "preserve the non-dom status" looks a little disingenuous.