When the British Government was looking for a way to fund World War 1 back in 1914, it hit upon the novel idea of taxing Britons not only on their UK income but on foreign earnings too.
But one group was exempt from this taxation, and that was foreigners resident in the UK, otherwise known as the non domiciled. Herbert Asquith, who was Prime Minister at the time, could have hardly foreseen that the fallout from this decision would still be felt more than a hundred years later.
While many tax havens are not particularly appealing places to live, London has for many years provided the perfect storm of being a dynamic world city, while conferring very real tax advantages for those who could claim to be domiciled abroad. This does not just include the foreign born, but also Britons born in the UK whose father or grandfather enjoyed non dom status, such as Zac Goldsmith, who only gave up his non dom status when he became an MP. Non dom status can even be claimed by some who were born and brought up in the UK and whose parents were not non doms, such as Stuart Gulliver, chief exec of HSBC, who retained his non dom status after returning to the UK from abroad because he said he planned to retire to the Far East.
The Government has for some time been tightening the tax rules for non doms, trying to find a balance between getting them to pay more tax whilst not making the tax regime so punitive that they vote with their feet. At present, qualifying non doms can elect to be taxed on the remittance basis. This means they do not pay tax on income and assets kept offshore. In 2008 a charge of £30,000 was introduced for those choosing to be taxed on the remittance basis who had been resident for seven years. This now rises up to £90,000 after 17 years but they retain the offshore tax exemption. The only exception to this is inheritance tax (IHT), to which they become liable after 17 years of UK residence.
In July's Budget it was announced that from April 2017, non doms who have been UK-resident for more than 15 of the past 20 years will no longer be able to elect for the remittance basis. They will be deemed domiciled and will become liable to UK tax, including inheritance tax, on all overseas assets. In addition should a non dom wish to leave the UK and then return, the time required to restart the clock for non dom status will increase from four to five tax years.
In addition to this, the rules are being tightened for those non doms who own UK residential property via an offshore company or other structure. At present they are not liable to UK inheritance tax on the property although they must pay an annual tax on enveloped dwellings (ATED), which was introduced in 2013. From April 2017, though, they will be liable for both IHT and ATED. When these measures come into force, London may well start to appear less attractive for the mobile non dom.
It was reported in September 2015 that UK based non doms paid £6.6 billion in income tax in 2013/14, up by 7% from £6.18 billion in 2012/13. This suggests that the current measures are having the desired effect. Whether the changes due in 2017 will mean non doms decide to relocate to countries with more favourable tax regimes or whether the pull of London proves too hard to resist, remains to be seen.
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