Francis Hoogewerf argues that given the UK's excessively difficult tax system, a couple of alternative jurisdictions could be considered for residence.
The United Kingdom
The old regime
Basically anyone considered to be resident but not domiciled or ordinarily resident in the UK was taxed only on income or capital gains arising in the UK or on income remitted from outside the UK into the UK.
The new regime
The new ‘non-dom’ rules are both complicated and create uncertainty. The charge of £30,000 for the rich is not the problem. The problem is the risk of being taxed on other income, capital gains, trusts and other assets outside the UK. People are not prepared to take these risks and are looking to live elsewhere or have already taken that decision.
For the purpose of this article there are three types of non-doms:
1) At first glance the very rich will not mind having to pay £30,000 to £60,000 per annum for the privilege of living tax free in the UK. On the other hand, it is not hard to see this ‘charge’ or penalty of £30,000 per annum being increased from time to time. The very rich will not wish to fill in tax returns on their non-UK income, nor will they be happy about paying tax on their imported luxury goods such as works of art, furniture and private jets. Furthermore, the new system appears to be excessively difficult to understand.
2) The second group of non-doms with income of less than £90,000 per annum will find it cheaper to elect to become both domiciled and ordinarily resident if they do not leave the UK.
3) The third category of non-doms, the ambitious young executives, will now think twice about leaving their homeland for London. The £30,000 charge (or tax for US purposes) per person will be too heavy, but it is applied only after seven years.
UK tax is payable on UK earnings in any event, but the £60,000 for a couple is effectively the equivalent of a tax or penalty on non-UK income, which means non-UK income would have to exceed £180,000 before any tax savings can be considered on a move to the UK.
Those having been in the UK for seven years or more have to think very quickly about leaving the UK, paying full tax on non-UK assets or paying the £30,000 penalty ‘tax’.
Alternative locations in Europe for (tax free) residence outside the UK are:
London has over the years become an exciting centre not only to live in but also for banking and finance, few places being able to compare in this respect. However, there are other choices of countries in Europe.
Andorra has no personal income tax, no wealth tax and no inheritance or gift tax, and personal privacy and confidentiality are protected by legislation, but it is rather remote being over two hours away from Barcelona and Toulouse. Andorra only accepts 200 new residents per annum. There is a deposit to pay.
Belgium is one of the few countries not having capital gains tax. Foreign executives can apply for non-residential fiscal treatment for an unlimited period and be taxed on Belgium-sourced income only. Brussels is an attractive international capital city, although the financial centre is not well known for international business compared to other countries on the list.
Ireland basically has the old UK system. The financial centre is interesting; it is quite international in approach, and a comfortable and attractive country to live in. For non-doms, income from foreign sources is liable to Irish income tax only if remitted to Ireland. Furthermore, a non-dom is liable to tax only on gains arising in Ireland or remitted to Ireland. It also has been successful in attracting funds and fund administration. Ireland is one of the few English speaking countries in Europe.
Luxembourg is very international, not only being a financial centre but also an industrial centre. It is two and a half hours by train from Paris, Brussels and Frankfurt and is in the Schengen zone. The nice thing about the Luxembourg tax system is that both foreign residents and local residents are treated the same.
There is a worldwide tax system. However, if ones’ foreign assets are held through holding companies, no personal tax is normally payable until dividends and certain capital gains are made available to the resident taxpayer. This means one can live off capital, for example, loan repayment. Luxembourg has a maximum annual 10 per cent tax on savings interest for residents.
This country has a similar system to the UK system for non-doms. Individuals ordinarily resident in Malta are taxable on income and gains realised in Malta, and only on the foreign income remitted to Malta. The Maltese permanent residency ensures a flat tax rate of 15 per cent on all income received in, or remitted to Malta, with a minimum annual tax liability of €4,150. In this case, individuals may not pursue employment in Malta and should in practice have an income equivalent to €23,000 arising outside Malta, or capital equivalent to €349,000.
This small country has no personal income tax for residents except for French nationals. One needs to show physical residence for six months of the year and sufficient means to be able to afford the lifestyle. Monaco is easily accessible by road, sea and air and offers an ideal location on the French Riviera
Switzerland has the ‘fixed tax’ deal which means that the taxable income is based on roughly five times the annual rental value of property on which the normal cantonal tax rate is applied. There are disadvantages: one may not work in the country and the main languages are German (Zurich), French (Geneva), Italian (Lugano). Switzerland is of course very international, well located, good for finance and it has a very high quality of life.
This is an Italian enclave in Switzerland. It is rather small, but residents do not pay the full Italian income tax.
Channel Islands and Isle of Man
Tax at around 18 per cent to 20 per cent is reasonable, especially for ambitious executives. There are maximum income taxes to pay of roughly £100,000 per annum in the Isle of Man and £250,000 per annum in Guernsey, while wealth and capital gains taxes are not levied.
The problem is that these islands are rather remote for the international jet set, but the proximity to the UK might be an advantage.
To conclude, it is hard to replace the lifestyle of London and the UK, but the UK’s excessively difficult tax system may be the deciding factor.
Francis Hoogewerf, Hoogewerf & Cie, Luxembourg