UK non-doms taxed after 15 years! Do I stay or do I go?
By Prof Robert Anthony, Anthony & Cie
In its recent budget legislation, the UK government made a change which affects the tax paid by residents who have lived in the UK for more than 15 years while earning income from abroad. For many years, the UK has attracted a number of Asian, Middle Eastern, African, South American, European and more recently Eastern European individuals who do not have to pay tax on their worldwide income. U.S. nationals who are taxed on their worldwide income will not be as affected as others, as it is the effective rate of tax which could be an issue.
This change has come as no surprise. As a professor of international tax law and a chartered certified accountant, I remember when Gordon Brown, as Chancellor, lobbied then-Prime Minister Tony Blair to change the status of non-domiciled UK residents. Since that time, there have been a series of tax increases affecting taxation of trusts and changes to non-domiciled status. As if that wasn’t enough, capital gains tax on property for foreign residents and taxation on corporate ownership of residential property have also increased.
All is not lost. It is important to be realistic and appreciate that many people with an ultra-high net worth have corporate structures in place which are not really affected on a taxation basis unless there are distributions. In addition, it is still possible to legally defer taxes provided UK domestic legislation is respected. Income can still be earned in the UK in a tax efficient manner. However, one should not overlook the importance of inheritance tax issues and careful planning in order to protect families – it is not all that easy. A family that has lived in the UK cannot simply up sticks to go and live elsewhere. There are other family members to consider, the lifestyle and more. Then, one needs to consider where to go. Monaco, Malta and Portugal come to mind, but this may not be the right choice for everyone. It is also important to think about more substantial issues: many people will retain their property in the UK. What will be the tax status of this in 15 years’ time?
The lifetime gift allowance enables individuals to pass their assets on to children by gifting them. If they do not die within seven years of this happening, inheritance tax will not be levied and there is a tapered inheritance tax rate during the period leading up to this. This is not always practical, however, and the age of the individual is relevant in this respect as well as sufficient confidence in the recipient.
Large fortunes are complicated and often require the involvement of a family office in running affairs. Are Scandinavian families prepared to move their family office to another country? Will the Swiss just leave? How will the South Africans cope? Certain nationalities may not wish to return to their home country, but in order to preserve family wealth it is important to carefully consider the implications of any decision.
In London alone there are over 500,000 French people. Some of these will be affected by this new legislation as the fiscal advantage of the UK will simply be the avoidance of wealth taxes on non-French based assets. The liberation of pension funds has led to certain foreign nationals holding considerable assets outside of the UK in the form of capital yielding assets. Careful planning is required or all these assets will become taxable.
Every case is different and it is advisable to obtain advice concerning one’s individual circumstances. An international hedge fund manager, merger and acquisition partner or corporate banker distributing their profits outside the UK in a foreign vehicle or a fund in Luxembourg or elsewhere will now be taxed on those distributions after 15 years of residence. UK anti-tax avoidance legislation will focus on sham structures to avoid tax and probably treat them as transparent entities which are subject to UK taxation. The exchange of information will open a Pandora’s box if these routes were put in place whilst remaining resident. Certain people carry out international trade whilst living in the UK, but their profits are currently kept outside the UK. One could argue that their services were performed in the UK, although this is not always the case. Modern technology and the efficient exchange of information makes it much easier to establish the reach of a transaction. Germany has already interpreted differently a transaction on the basis that the contract does not need to be signed in Germany to be considered a German transaction. The UK has recently slightly modified its legislation to take into account Base Erosion Profit Sharing. It is clear that ever more tax free environments are being closed down.
Europe has attacked corporations such as Starbucks, Amazon and Apple. Now the UK is taking steps against wealthy people not paying tax. In my youth, tax evasion was frowned upon. Later it was seen as “tax planning” and now it is simply “not paying tax”. This trend is unfortunately spreading through many jurisdictions. In addition, there is constant pressure from countries on low tax jurisdictions to increase their taxation. Luxembourg has already started amending its domestic tax legislation accordingly.
Do I stay or do I go? And if I go, where to and for how long? That is the question on my mind.
Prof Robert Anthony
Anthony & Cie, Valbonne, Sophia Antipolis, FranceE: This email address is being protected from spambots. You need JavaScript enabled to view it.; W: www.antco.com
Published: January 2016 l Photo: Colourbox.de - Julie Svanberg Grath