Non-Domiciles Remain in U.K. Despite Brexit, Tax Hit Risk

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By Ben Stupples

Aug. 24 — The U.K. may have voted to leave the European Union, but one group within the country’s international community—U.K.-based non-domiciled residents—is choosing to remain for the moment.

U.K. tax advisers say that the majority of the U.K.'s non-domiciled residents are choosing to remain in the country despite the eventual risk of them losing their tax exemptions on foreign earnings.

The government proposed to overhaul the taxation regime for non-domiciled residents in a September 2015 consultation document. The plan is to reclassify non-domiciled residents, who currently pay no U.K. tax on either foreign income or capital gains, as U.K.-domiciled for tax purposes from April 2017 once they have lived in the country for 15 of the past 20 tax years.

In a further Aug. 19 consultation document—delayed until after the U.K. voted on June 24 to leave the European Union—Her Majesty's Treasury confirmed its commitment and outlined further details on how non-domiciled residents will be liable to inheritance tax.

No Exodus

Yet despite the 11-month wait, the Treasury’s latest consultation and the political uncertainty of the U.K. since June 24, only a small number of non-domiciled residents, or non-doms, have inquired about relocating from U.K., said Carolyn Steppler, a London-based private client tax partner at Ernst & Young.

“I’ve had one or two clients who have said that they would like to explore moving, but it’s been more of a trickle than a mass exodus from the client base,” she said. “A lot of them are based here for business reasons, and it will take a while for them to change business practices and leave the U.K.”

Fiona Fernie, a London-based head of tax investigations at international law firm Pinsent Masons, said there are few incentives for non-doms to leave if they are settled with families in the U.K. She stressed the importance of not letting non-doms’ taxes take priority over their lifestyles of choice.

“You’ve got to be quite committed to let your tax tail wag your lifestyle dog,” she said. “I’ve had a couple of clients who have left as they’ve decided their families are international and they don’t need to be in the U.K., and they’re not going to be wedded to the U.K. any longer,” she added.

Lakshmi Mittal

Under rules that date back to 1914, wealthy individuals who live in the U.K. but claim their domicile is overseas pay tax on their worldwide income and capital gains only if they bring the money into the U.K.

Non-doms can also avoid capital gains and inheritance tax on U.K. assets by holding them in a foreign company or trust, according to a May 2008 parliamentary report on non-doms’ taxation.

There were 114,300 non-domiciled residents in the U.K. who paid 6.6 billion pounds ($8.7 billion) income tax in 2013-14, the latest figures available, according to Pinsent Masons.

Non-domiciled individuals 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 Moscow-based iron ore miner and steel manufacturer Evraz Plc.

Former U.K. Chancellor George Osborne announced plans to scrap a provision on individuals claiming permanent non-dom status in the 2015 Summer Budget. As part of the changes proposed, non-domiciled residents will have to pay inheritance tax on U.K. residential property held through trusts or holding companies worldwide instead of those solely based in the U.K.

1.5 Billion Pounds

In its 2015 Summer Budget, the Treasury calculated in changes are expected to bring in 1.5 billion pounds to the U.K. government by 2020. Yet the May 2008 parliamentary report warned of a “net loss” to Treasury coffers following an “exodus” of non-dom businesspeople from the U.K.

“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.”

To avoid imposing a “punitive outcome” for non-doms bringing offshore income into the U.K., the Treasury said in the latest consultation that it will introduce a one-year window from April 2017 for non-doms to separate funds that contain non-taxable income under the U.K.’s non-domicile laws mixed with offshore income, which would otherwise be taxed once the new laws are implemented.

For those non-doms who have lived in the U.K. for the past 15 years, HM Treasury also said in the Aug. 19 consultation that it will allow them to re-set overseas assets to market values from the same date so they avoid paying capital gains tax on value accrued before they are U.K.-domiciled.

Fairer Proposal

“This is certainly a fairer proposal and will allow non-doms to retain the use of trusts as estate planning and asset protection vehicles without facing a disproportionate tax charge on monies taken out of the trust,” said Mark Davies, managing director of London-based international tax advisory firm Mark Davies & Associates, which specializes in providing financial advice to non-doms.

Yet despite these concessions, Dean Mullaly, managing director of Mark Dean Wealth Management, said that one of his clients had already decided to leave the U.K. by the end of the year and had chosen Dubai over Singapore as their new home.

“There’s a tipping point in these rules,” he said. “When you speak to clients, they say ‘I don’t mind paying my fair amount of tax, but I’m damned if I’m going to pay 45 percent,’ ” he added, in reference to the U.K. income tax non-domiciled residents would have to pay if they are U.K.-domiciled.

Low-Tax Options

Non-domiciled residents looking to leave the U.K. to low-tax jurisdictions could move to Jersey, Guernsey, Switzerland, Gibraltar, the Cayman Islands, the British Virgin Islands or Bermuda, said barrister Richard Wilson, who specializes in private international law and offshore jurisdictions.

Guernsey has seen an upswing in enquiries about moving to the island since the U.K.’s vote to leave the European Union, according to Richard Le Tocq, head of Locate Guernsey. Jersey, meanwhile, is currently scheduled to reach its target of attracting 20 high-net worth individuals to the island within the calendar year, according to Kevin Lemasney, director of high-value residency at Locate Jersey.

“In principle, it’s going to make anyone who is resident and is going to be treated as domicile think twice about whether they want to stay,” he said about the incoming tax changes for non-doms who have been residents in the U.K. for the 15-year time frame. “The question is whether that tax change will be enough to make them go, and the Treasury seems to be taking the view that it won’t.”

Barclays Plc’s private wealth management services and UBS Group, which both provide specialist wealth management services for non-domiciled individuals, declined to provide comment for this article.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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