As the owners of multinational companies, newspapers, and Premier League football clubs, the U.K.’s non-domiciled residents are some of the country’s most well-known wealthy individuals, reports Bloomberg
In general, they shun the spotlighted red carpets and white runways of film and fashion events.
Over the past few years, however, the U.K.’s non-domiciled residents have drawn the glare of a different sort of spotlight as public anger has grown over the tax—or lack of tax—that they pay.
“There’s currently a perception they’re evading taxes and not playing by the normal rules,” says Matthew Braithwaite, a private wealth tax partner at London-based law firm Bircham Dyson Bell.
“The politics of envy has grown so prevalent across this country that wealth, just as much as something like offshore tax havens, has started to become a dirty word,” says Fiona Fernie, a London-based head of tax investigations at international law firm Pinsent Masons.
The U.K.’s original laws for non-domiciled residents, or non-doms, dates to 1799 when Britain was at war with Napoleon, and British coins displayed a laurel-wreathed portrait of King George III.
Under current law, U.K. residents with non-domiciled status are exempt from paying U.K. income tax or capital gains on foreign income, and they are only liable for inheritance tax on U.K. property.
Yet in April 2015, former Labour party leader Ed Miliband announced he would abolish these tax exemptions—which prompted former Chancellor George Osborne to announce the same measure at the 2015 Summer Budget after the Conservatives beat Labor in that year’s general election.
No Special Rules
Since then, the spotlight on the U.K.’s non-domiciles has sustained a steady glare through the publication of various reports on the U.K.’s taxation of wealthy individuals—defined as someone with assets of more than 20 million pounds ($25 million)—by Her Majesty’s Revenue and Customs.
The U.K.’s tax authority is currently aiming for a 100-fold increase in the annual number of wealthy individuals and corporations criminally prosecuted for tax evasion by 2020, according to a Nov. 1 report from the U.K.’s National Audit Office last year on the taxation of high-net-worth individuals.
Most recently, a Jan. 27 report from the U.K.’s Public Accounts Committee, which oversees the U.K. government’s spending, urged HMRC to get tougher on wealthy individuals who break the rules to dispel the perception that there is “one set of rules for the rich and another for everyone else.”
In addition, HMRC is seeking details on the name, jurisdiction and date of registration of offshore structures, and the details of anyone—a large number of whom will be non-doms—with ownership interests in them, according to a Jan. 17 notice published by the U.K.’s representative for solicitors.
“It’s a fine balance, and we’ve got to be really careful not to drive anyone away from the U.K. as we need foreign direct investment, especially in light of Brexit,” says Dean Mullaly, managing director of London-based Mark Dean Wealth Management, on the U.K.’s taxation of wealthy individuals. “They see them as an easy target, but I don’t there’s actually less money there than HMRC thinks.”
6.6 Billion Pounds
There were 116,100 non-domiciled residents in the U.K. who paid a total of 6.6 billion pounds to HMRC through income tax in 2014-15, the latest figures available, according to Pinsent Masons.
Non-domiciled residents living in the U.K. today include Lakshmi Mittal, the chairman and largest shareholder of Luxembourg-based ArcelorMittal, the world’s largest steelmaker, and Roman Abramovich, the majority shareholder of London-based iron ore miner and steel manufacturer Evraz Plc, as well as the owner of English football club Chelsea. Between them, Mittal and Abramovich have a calculated net worth of more than $25 billion, according to the Bloomberg Billionaires Index.
Barclays Plc’s private wealth management services and UBS Group, which both provide wealth management services for non-doms, did not respond to Jan. 30 e-mailed requests for comment.
From April 2017, as part of the government’s tax reform, non-domiciled residents will have to pay inheritance tax on U.K. residential property held through trusts or holding companies worldwide.
They also will be treated as U.K.-domiciled once they have lived in the country for 15 of the past 20 years, yet they can reset the 15-year limit if they spend six consecutive years outside the country.
In the 2015 Summer Budget, Her Majesty’s Treasury calculated that the non-dom tax reform will bring in 1.5 billion pounds to the U.K. by 2020. Yet a May 2008 parliamentary report previously warned of a “net loss” to the U.K. following a possible “exodus” of non-dom business individuals.
“Reform is a big problem for policymakers too, because the wealthy foreigners who could be affected are extremely diverse,” the 2008 report said on changes to non-dom taxes. “They include the super-rich who do not need to work, leading figures in the City of London, and ship-owners.”
“We’re still seeing a very targeted approach to high net worth individuals, including to non-doms,” says Fernie. “I think you will find that, the more people are targeted in this way, the individuals with international businesses that have branches all over the world simply won’t live in the U.K.”
No Non-Dom Flood
So far, though, there has only been a “trickle” of non-doms deciding to leave the U.K. due to the tax reform, according to Ray McCann, a London-based partner at U.K. law firm Joseph Hage Aaronson.
He also highlighted the possible benefits to the U.K.’s tax overhaul, with non-doms not facing the prospect of capital gains tax on any increase in value of their assets before the changes take effect.
Allowing non-doms to revalue their assets is part of a “big giveaway” on future tax receipts from HM Treasury and HMRC, he says. “There is nervousness among clients, who are saying this is terrible, but with every tax change you have to read carefully between the lines” to find the potential benefits.
But the current trickle of non-doms leaving the U.K. may become a flood if the government penalizes them further, or other countries try to entice them by introducing more attractive non-dom regimes.
Most recently, as part of its 2017 budget, Italy brought in this month a new non-dom tax regime that exempts foreign income from Italian tax in exchange for a fixed annual payment of 100,000 euros.
In line with the warning this month from HSBC Holdings Plc Chief Executive Officer Stuart Gulliver that the lender’s investment bank may move to Paris, a lot of London-based French bankers would also move to their home country’s capital if France reduced its wealth taxes, according to McCann.
“We do need to be careful, but it’s not a flood yet,” says McCann, who previously worked as an HMRC inspector. “But the point I keep making is that—with central London and the high-end property market, for example, although it’s taken a recent hit—the U.K. still has a lot to offer.”
HMRC PAC Response
In response to the Public Accounts Committee’s report, HMRC said in a Jan. 27 emailed response it provides “absolutely no special treatment for the wealthy,” adding that it scrutinizes them more.
The tax authority uses “one-to-one marking” of wealthy individuals’ taxes by special tax collectors, helping “to ensure that they pay everything they owe, just like the rest of us do,” HMRC added.
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