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Bad News for Non-Doms? – Putting a Price on the “Remittance Basis”

Bad News for Non-Doms? – Putting a Price on the “Remittance Basis”
The days leading up to the Pre-Budget Statement on 9 October saw an undignified game of “tit for tat” between Alistair Darling (or, let’s be honest, his puppet-master Gordon) and the Shadow Chancellor, George Osborne. The results were a piece of legislation on Inheritance Tax which had been gathering dust in a drawer in Number 11 Downing Street since March (when the Treasury told Gordon he couldn’t have transferable Nil Rate Bands for IHT and show off by cutting the basic rate of income tax), an ill thought out hike in capital gains tax (to pay for the Nil Rate Band stunt), and a spiteful piece of legislation aimed at the less well off non-doms.

 

A “non-dom” is someone who, though they may be resident in the UK, is not “domiciled” here. “Domicile” is a curious and anachronistic concept, which dates back to the days of Empire, when lots of UK citizens were out of the country ruling the world, but still needed to be taxed in the UK to pay for the running costs of Rule Britannia plc.

 

Your domicile is the country you call home. When you are born, you are assumed to have your father’s domicile, and until you are an adult, yours follows his, as your “domicile of origin”. Once you are a grown-up, you can acquire a new “domicile of choice”, if you move to another country and settle there.

 

When I say “settle” I mean really uproot from the old country (wherever that may be) and commit permanently to the new country. The old chestnut was that if you wanted to become domiciled in a new country, you bought yourself a burial plot there, as a sign that you had no plans to leave, but this is a simplistic view of the matter.

 

Essentially, you retain your domicile of origin if you do not show a clear intention to reside permanently in another country. I recently acted for a very old gentleman who had left his country of birth due to political problems, and had lived in the UK for over 50 years, raising a family here. He always swore he would return to his native land if the political situation made that possible, but sadly, by the time it was, he was too old and frail to do so. HM Revenue and Customs accepted that he was still domiciled in the old country.

 

Non-doms have enjoyed a comparatively benign system of taxation in the UK. Essentially, if resident in the UK, they are liable to UK income tax on their UK income, and to UK CGT on their UK capital gains, but if they have income or gains from sources outside the UK, they are only liable to UK tax on those if they “remit” the money to the UK.

 

“Remittance” has a wide meaning, and catches such things as using an offshore bank account to pay off debts incurred in the UK, but it is true that, because of the way the law is drafted, there were a number of tricks you could pull if you were a “non-dom”.

 

To take one example, if you had an offshore bank account paying interest, you closed the account on 4 April and moved the funds to a non-interest bearing account with another offshore bank, and then transferred the funds from that account to the UK on 6 April.

 

Because UK income tax is charged on income for the year in which the “source” of that income exists, you were not liable to tax in the UK on the interest because the “source” (the interest paying account) did not exist in the same tax year as the “remittance” to the UK.

 

For a number of years, these and other “non-dom” tax planning techniques have been a source of irritation to HMRC. There have been numerous rumblings about reforming the taxation of non-doms, but they have all come to nothing because the net result would probably be to lose rather than gain tax revenue.

 

The non-doms who escape significant amounts of UK tax by these ploys tend to be wealthy and internationally mobile people, who could simply pull out of the UK if they were taxed too heavily.

 

Goaded by pressure from the Tories, Gordon (sorry, of course I mean Alistair) has finally come up with a solution – legalised bribery. From April 2008, if a non-dom wants to enjoy the benefits of the remittance basis, and if he has been resident in the UK for the past seven years, he will have to pay an annual “tax charge” of £30,000 for the privilege.

 

If he does not come up with this “bung”, he will pay income tax and capital gains tax on his worldwide income and gains, just like a UK domiciled resident. It is not specified in the Press Release that this will have to be paid in used fivers, so I assume HMRC will take a cheque.

 

Of course, this will be bad news for the numerous non-doms who come here to earn a living, but it is a mere fleabite to the seriously wealthy. On 9 October, I watched an interview on TV with an investment banker who was resident here but not UK domiciled. She said that as long as the bribe was “reasonable” she thought it would not affect her plans. Told the suggested figure was £30,000, she appeared quite relieved, and said that was “quite acceptable”.

 

If ever there were a case of one law for the rich and one for the poor, this is it. If Gordon has instructed Alistair to form the opinion that the “remittance” basis of taxation leads to anomalies and unfair results, then they should reform it by doing away with it, not by putting a cash price on it and turning it into a luxury item that can be purchased by the seriously rich.

 

The Press Release also speaks of a “greater contribution” to be extracted from those non-doms who have been UK resident for more than ten years. No doubt, in the classier UK nightspots, there will develop a form of one-upmanship among the non-doms – “Oh, you’re still on the £30K sweetener, are you? I moved up to the platinum bribe last year”.