There has been a big hue and cry about Chancellor of the Exchequer Alistair Darling’s proposals for increasing the tax burden on those that are resident in the UK but not domiciled for tax purposes in the UK.
As the law stands today, the remittance basis of income taxation applies when an individual is resident in the UK but non-domiciled for income tax purposes. Tax domicile is a fuzzy concept. Even if you live most of the year in the UK, you could be considered domiciled in another country if you were born in that country and express the intention of being buried there. You can be non-domiciled for income tax purposes even if you live in the UK and have British nationality. Under the current law governing non-domicile status, certain non-UK income is excluded from UK income taxation if it has not been remitted to the UK. It’s a pretty strange part of the income tax code, but as it is a free option for those eligible, you would be mad not to sign up for it if you could. I certainly did when I returned to the UK in 1994, even though I had/have negligible non-UK income and remit to the UK what little there is.
The government proposes that from April 2008 on, when an individual has been resident in the UK in at least 7 out of the 9 tax years immediately preceding the relevant tax year, they will be subject to UK income tax on their worldwide income unless they pay a £30,000 annual charge. For me that makes it easy. As of April 2008, I shall no longer claim non-dom status.
The £30,000 annual charge is per person, not per family unit, so a couple of Greek ship owners with three adult kids working in the business would have to pay £150,000 extra per year. If they own just a few small ships, this may well cause them to consider relocation to Athens.
In addition to the £30,000 annual charge, the proposed new legislation also closes a lot of loopholes that in the past made it possible to effectively remit income earned abroad to the UK without incurring income tax. For instance, it would make subject to UK income tax (even when they accrue to non-doms) income in kind and gifts remitted from abroad as well as capital gains on UK assets parked in non-resident (offshore) trusts. This appears to be the part that truly upsets non-doms with serious amounts of assets that are currently beyond the reach of the UK tax authorities.
From the among of media noise generated by the issue you might infer that millions of unfortunates are about to be take to the cleaners and that the foundations of British prosperity are being undermined. It turns out the number of those directly affected is tiny, about 130,000. But the people in question are often very wealthy and well-connected. They lobby very effectively and can orchestrate/pay for an explosion of unrest bordering on hysteria in the media, amidst the representatives of the UK tax avoidance industry and among the UK-based providers of luxury goods and services who would lose business if the non-dom community were to become non-res as well.
So up to 130,000 (most likely far fewer) non-domiciled residents (quite a few of them high earners) would leave the UK. Would they be missed? Is it on the contrary mostly a case of good riddance to bad rubbish? Or doesn’t it matter very much? Probably a bit of the first two and most of the third on balance. Would I be sad if Roman Abramovitz were to leave, or other conspicuous consumers and beneficiaries of wealth of possibly questionable provenance? Probably not. I am an Arsenal supporter after all.
The main indirect effect of the proposed increase in taxes on the non-doms (if they were to leave and not spend as occasional or even regular visitors as much as they now spend as residents) is through their consumption of non-traded goods and services, including charitable giving – a form of conspicuous consumption unless it is double-blind. The demand for magnums of 1961 Petrus (at £18,000 a bottle) would suffer. So would a few luxury shops, restaurants and studs. Upper bracket property prices in London and the home counties would fall. With a bit of luck, the fall in property prices would spread more widely.
Anything that lowers London house prices is probably a blessing from a social point of view. For the quality of life in this city, it is much more important that its key workers (teachers, police, fire fighters, nurses, bus drivers and train drivers etc.) be able to afford a home reasonably close to their places of work than that a few millionaires/billionaires be willing to honour us with their presence.
The effect of the proposals on the supply of highly skilled (or at any rate highly paid) labour (financial wizards, star lawyers, fashion designers, pop stars and tennis gods etc.) is likely to be limited. You only get hit if you have had non-dom status for at least 7 of the last 9 tax years. Most financial geniuses suffer burn out in less than seven years. Tennis and pop careers are even shorter.
The notion that if the non-doms were to be taxed the same way everyone else is, there would be some massive brain drain from the UK that would make those left behind in this country noticeably worse off is laughable, self-serving cant.
The manifest unfairness of a tax regime that favours the rich and the internationally mobile through loopholes and strange domicile rules is likely to undermine tax compliance and respect for the law among the population at large.
If I were the Chancellor, I would not bother with the £30.000 annual non-dom fee. Instead I would simply abolish non-dom status. I would also actively pursue the closure of as many offshore trust loopholes as possible. It would of course be preferably if this could be done in an internationally coordinated manner, beginning, say, with the EU, the US and Canada.
UK residents should be taxed on their world-wide income, regardless of there they keep the assets/earn the income. That’s the sensible principle applied in the US (the US then rather goes and spoils it by taxing US citizens – even green card holders, I believe – who are not resident in the USA, on their worldwide income anyway.)
Let the non-doms who don’t like this take off to their tax havens. They can have the tedium of Monaco, the bland boredom of Switzerland, the stifling autocracy of Singapore and the expatriate bubble-wrapped society of Dubai. I’ll stay in London.