Non-Domiciled UK Residents May Lose Tax-Exempt Status

by Jason Gorringe, Tax-News.com, London

23 July 2003

For some time, the UK government has been considering tightening the rules allowing non-domiciled residents of the United Kingdom to escape taxes on income derived from overseas.

Now Chancellor of the Exchequer, Gordon Brown, is due to receive a progress report later this month on a review of the tax system relating to 'non-doms'. It has been estimated that a tightening of the system would net the Treasury up to £1.5 billion a year in additional revenue, according to the Financial Times. Under current rules, foreigners are not liable to pay UK tax on non-UK investment income, non-UK earnings and non-UK capital gains, provided that these monies are not brought into Britain. Non-domiciled residents are also not liable for UK inheritance tax on overseas assets.

"As usual, the Government wants to have its cake and eat it," Michael Caden, Tax Partner at the London office of national accountancy group Hacker Young announced this week. "Ministers are keen to encourage non-domiciled entrepreneurs, high net worth individuals, financial services providers, bankers and so forth, to continue to live and work here in the short-to-medium term," he continued, adding that: "On the other hand, they want to remove advantages and tax fully those who have been resident in the UK for some considerable time and intend to continue to reside here."

Any changes to these tax rules are likely to involve the introduction of a time-based test to establish a foreigner's eligibility for the tax break, probably something in the order of five to ten years. Once this time has elapsed, non-domiciled residents will likely be treated in the same way as every other UK taxpayer.

In response to such a move by the government, Mr Caden has formulated a five pronged plan of action for non-domiciled residents seeking to escape the clutches of the UK tax man: invest for growth rather than income; look for assets that attract taper relief on sales; transfer foreign income and gains abroad as gifts to family members who can import them into the UK tax free; establish a foreign trust to shelter non-UK assets from inheritance tax; and re-invest overseas assets to establish a new/higher base cost.

"The last time the Government attempted this kind of reform they met with stiff resistance," Caden explained. "They could be in a more determined mood this time around and changes may be afoot."

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