For many non-doms it’s simply not feasible to restructure their affairs, writes Mark Davies
In July 2015, the chancellor, George Osborne, announced that foreign domiciliaries or ‘non-doms’ could no longer claim the ‘remittance basis’ indefinitely. In addition, Osborne closed the loophole whereby UK domiciled individuals could still claim a foreign domicile having returned to the UK.
Claiming the remittance basis allows non-doms to avoid tax on foreign income and gains to the extent that this wealth remains outside the UK. New rules came into effect on 6 April 2017, which means that those who have been UK resident in 15 out of the last 20 tax years become ‘deemed domiciled’ and now pay tax on their worldwide income and gains.
In compensation, the government changed the way that settlors of offshore ‘protected trusts’ are taxed, which means that a tax liability only arises when a distribution is made or a benefit enjoyed from a protected trust.
The chancellor claimed that these changes would result in an extra £1.5 billion for the Exchequer over the next Parliament. However, the Office for Budget Responsibility cautioned that the revenue depended on the numbers of non-doms staying constant, the amount of foreign income they have, and their behavioural responses.
The reduction in the number of people claiming non-dom status is obvious (see box). In particular, there is a sharp drop of 12,200 claimants in 2017-18. Two causes stand out. Firstly, because some people became deemed domiciled they now pay tax on their worldwide income and gains.
However, their tax contribution is not recognised in this HMRC table and its omission raises the concern of whether Osborne achieved his objective to raise more tax. Secondly, roughly 6,000 non-doms have left the UK.
Although Brexit and the fear of a Labour government account for some departures, I think that the main reason is that many non-doms who became deemed domiciled in 2017-18 could not restructure their affairs.
This is because non-doms by their very nature are people who have decided not to live in the UK permanently, and therefore they have homes, families and interests outside the UK.
A protected trust enables foreign income and gains within the trust to escape tax, but if distributions are made, or benefits received, either in the UK or abroad then these become taxable in the UK. For the first time, the UK tax bills of some non-doms are not making commercial sense.
For many this is too much tax, and so we have helped a number of clients relocate to more favourable tax regimes. There are a number of jurisdictions which compete with the UK, but the favourites include Switzerland, Monaco, Italy and Portugal.
Ironically, non-doms choosing to move to the UK now can use the protected trust regime to have a lower effective rate of tax than before the changes; although pre-arrival tax planning is essential to achieve this.
Mark Davies & Associates is an award-winning firm of Chartered Tax Advisers specialising in clients with international exposure. Mark Davies was named Tax Commentator of the Year by Tolley’s Taxation magazine and Tax Accountant of the Year by Spear’s magazine.
The firm collaborates with Andersen Global, an international association of 4,500 tax and legal advisors in 144 worldwide locations. If you would like to discuss your tax affairs in confidence please contact Mark Davies on firstname.lastname@example.org to arrange a call (terms and conditions apply)
This article first appeared in issue 69 of Spear’s magazine, available on newsstands now. Click here to buy and subscribe.