Primarolo Leaning Towards Reform Of UK Domicile Rules

by Jason Gorringe, Tax-News.com, London

16 September 2003

It appears that the tide is inexorably turning in favour of reform to the UK domicile rules which currently allow many wealthy foreigners to pay no tax on their worldwide income in the United Kingdom. This follows comments made by the Paymaster General to the Financial Times that she was increasingly hard pressed to justify the current state of affairs to her constituents.

Under the present 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.

Primarolo told the FT: "There seems to be quite a lot of agreement it is not fair...People pay tax...and they want to ensure they are paying a fair amount compared to anybody else." It has been estimated by the Treasury that the government stands to gain between £1 billion and $1.5 billion from a tightening of the domicile rules. However, some experts contend that the government could actually lose revenue if changes prompt an exodus of wealthy foreigners from the UK. Consequently, previous plans to revamp the rules were quickly shelved in the face of opposition from the City's finance community, which relies on being able to recruit overseas talent.

"What I am hoping this time is we will actually get to the bottom of it," said Primarolo, however.

Many organisations such as Ernst & Young and the Chartered Institute of Taxation are supporting the prospect of reform in this area of tax law, in the hope that new legislation will make the domicile rules simpler. Also, by taking a proactive approach to the reforms, they are hoping to stave off more radical proposals that Gordon Brown may be considering.

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.

Nevertheless, some in the accountancy profession remain opposed to any changes that are likely to result in non-domiciled foreigners paying more tax. Michael Caden, Tax Partner at the London office of Hacker Young told the FT recently that the government simply "wants to have its cake and eat it."

Responding to Treasury and Inland Revenue proposals on the issue, 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.

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