UK To Change 'Non-Domiciled' Rule At Its Peril

by Jason Gorringe, Tax-News.com, London

15 March 2002

After it was revealed at the weekend that UK Chancellor Gordon Brown is considering closing a tax loophole which benefits non-domiciled residents, leading professionals have warned that any major change in the rules could lead to a mass exodus from the country.

The loophole offers exemption from tax for income from foreign investments for people who are resident but not domiciled in the UK. The concept of domicile, which is unique to the English-speaking common law jurisdictions, attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few 'visiting' residents will therefore have a UK domicile.

For expatriate executives with assets to invest, a UK posting or residential base therefore offers very good tax planning opportunities. Foreign investment income is exempt from tax for such individuals as long as the income is not remitted to the UK. Therefore they can safely make offshore investments knowing that the income will be reinvested without deduction - the ideal way of turning income into capital without taxation.

American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, can't take advantage of this UK possibility, but for all other nationals, it is available. This rule has led to many foreign celebrities making the UK their home for tax purposes.

The use of 'non-domiciled status' to avoid paying UK taxes on overseas income was highlighted by the recent controversy over steel magnate and Labour donor Lakshmi Mittal, which caused the Government some embarrassment, as it had criticised the Conservatives for failing to close the loophole when in opposition.

An Inland Revenue report commissioned by the Chancellor last year revealed that over 60,000 long-term UK residents claim 'non-domiciled' status, at an estimated loss to the Treasury of between £4-5 billion per year.

But on Thursday senior bankers and accountants warned that financial institutions will find it harder to attract top overseas executives to London if the government goes ahead with plans to close a controversial tax loophole,

Leonie Cerswill, director of private client business at PwC, the professional services firm, told the Financial Times: "There is a sense that if these tax benefits were removed, these executives would be less tied to London," she said. "Given London's high cost of living, poor transport and bad weather, some have indicated that without non-domicile status they would not see the city as top of their list of places to live."

Experts suggest that the Chancellor is likely to consider the introduction of a 'two tier' approach to the problem, with those staying in the United Kingdom for short periods - perhaps under four years - to be permitted to claim tax residence elsewhere, and those resident in the country for longer to be subject to UK tax on their overseas income.

A clampdown on those who have already lived here for more than four years might prompt some to leave, said Paul Wigham, the partner at Deloitte Touche Tohmatsu responsible for private clients in London. "We have to bear in mind that many of these executives can ply their trade anywhere in the world," he says.

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