The UK government’s proposal to change the way it taxes non-domiciled residents has raised the ire of many in the City. A partial climbdown in mid-February did little to appease critics of the plan, and the Chancellor is being pressured to delay the introduction of the new tax regime.

What will the new £30,000 fee and changes to offshore trust rules mean for non-doms? Is the government simply closing tax loopholes, ensuring everyone living in the UK pays their fair share of tax? Or will the proposals actually reduce the tax take by driving highly paid workers out of the UK, and damaging the City’s reputation as a financial centre.

Our panel of accountants answered your questions on the principles and the practicalities (below) of the non-doms tax plan.

• David Harvey is Chief Executive of the Society of Trust and Estate Practitioners and an expert on family businesses and small enterprises.

• Richard Murphy, trained with KPMG before setting up his own firm in 1985. Since 2000, he has increasingly been involved in taxation policy, both as an adviser and campaigner. He is director of Tax Research LLP and advises the Tax Justice Network, the Publish What You Pay campaign and many NGOs on tax and development.

• Leonie Kerswill is the tax partner responsible for leading PwC’s London private client business. She has extensive experience of advising on cross border issues. The advice needed by her clients includes residence and domicile issues and income and capital taxes planning.

The panel answered the questions on Wednesday 20 February.

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Questions on the principles of non dom taxation

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With a cut off amount of £30,000, would this be the first tax proposal where on a percentage basis, lower earning non doms would be paying more than higher earning non doms? Haven’t we gone from a progressive tax to a regressive tax?
Andrew Wilmont, London

Richard Murphy: You’re right, in principle, but of course the whole domicile rule made the income tax system regressive already by allowing the wealthiest with investment income to avoid any tax charge on that income anyway.

And in truth most ’lower earning’ non-doms are not going to pay the £30,000. They’re going to accept the fair tax charge that applies to all the rest of us. So what this change really means is that the point of regression has simply moved up the scale a bit - from the quite wealthy to the very seriously wealthy now not paying the tax that is required of them if they were full blown members of the community, like the rest of us.

David Harvey: The new rules were designed to bring fairness to the UK system with regards to foreign residents. There are a number of problems on which STEP have had discussions with HM Treasury pointing out that the problems for foreign workers at the bottom end will make life very tough for them. For instance, if you were a Swedish construction worker and came to work on the London Olympics building sites and you worked half the year here and half the year back home in Stockholm you could have a problem. You would probably not earn enough to make it worth your while to pay the charge, and opt for the remittance basis, therefore you would pay worldwide UK tax as a UK domiciled resident would. However, the PAYE system does not cope well when the taxpayer earns foreign income so this Swedish worker would have to self assess. He would also pay taxes on the Swedish income he earned over in Stockholm. Self assessment is complicated and will create a huge headache for both taxpayers and HMRC. People will really need some serious help to be compliant and this will sting lower earning non-doms.

Also the flat charge of £30,000 is a lot of money for many non-doms particularly when you take into account that the whole family may end up having to pay the charge. Given that non-doms already pay UK income tax on UK income this is something that is making many people think twice about staying.

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Will the proposal to change the way non-domiciled residents are taxed have an impact on the City of London’s aspiration to be the financial capital of the world?
Viktor O Ledenyov, Ukraine

Richard Murphy: The change in the non-dom ruling will not change the City’s aspirations to be the main financial centre in the world. First of all we’re not dependent on just the few people who might leave (I admit) if this rule changes.

Second, the institutions in the City are not owned by non-doms and it does not in the slightest change the way they are taxed, so no bank or other company will go for this reason.

Third, the City of London works because of the cluster effect of all the institutions being together. Nowhere else can replicate that.

Fourth, there are a heck of a lot of good Brits who can work in the City and whose chances of doing so are being undermined right now because their non-dom competition is getting an unfair (and possibly illegal under EU state aid rules) subsidy to reduce their cost of employment.

So, no, is the answer, this will make no difference at all.

David Harvey: Potentially the impact could be very large. STEP recently conducted a survey that suggested thousands of the UK’s super rich are planning to up sticks or send investment overseas. This is not good for any of us or UK businesses of different shapes and sizes. Although HM Treasury have clarified a number of points that make the new regime fairer there are still plenty of people that are worried about the uncertainty of the tax regime and specific aspects that may affect them. Other countries will gladly take their investments from us.

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Britain is virtually unique in having a legal tax avoidance mechanism for non domiciled people. If it benefits our society, as some claim, would you recommend that all other countries made similar arrangements? If they did this, would it remove any advantage Britain had and just mean that rich people everywhere could avoid tax?
Jonathan Gill, Yorkshire

Richard Murphy: Let’s put this in context: what the UK has is a ’ring fence’ that means that those not normally resident here pay less tax than those who are normally resident here. In the business context both the OECD and EU have described such ring fences as harmful tax practices because they undermine the smooth working of markets and the efficient allocation of capital.

Britain is therefore acting contrary to international best interest, and its own, in my opinion. If all copied us we would, as you say have a free for all where capital would pay no tax and the burden of tax would be shifted entirely onto the ordinary working person and their labour. That is obviously grossly inequitable and would increase the wealth divide in society which causes untold harm including ill-health and increased crime.

So if all the world copied the UK we would have a breakdown of social order because the EU and OECD are right: these practices are harmful. That’s why the domicile rule should be scrapped, and the UK should accept its international obligation to do so and not compete upon the creation of an artificial factor of production called tax advantage which is unsustainable and makes it a tax haven.

David Harvey: Many, in fact most, states have some tax incentives for individuals and businesses to come to or invest in their country. Ireland, the Netherlands, Spain, Italy and the USA – none of which are traditionally considered low-tax countries provide strong draws for investment. Britain is a great place to do business and to live and work but it is not in any of our interests to damage our competitiveness.

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The manner in which the changes are being introduced is doing damage to the image of the UK as a country where non-domiciles are appreciated as a resource that adds value to the country. The proposed modifications are extremely complex and non-doms are being given little time to adjust. Shouldn’t the legislation be postponed so that a proper review of options can be made?
Bob van Oorschot, Aberdeen, UK

Richard Murphy: I don’t agree that we’re saying that non-doms are not appreciated. I think bending over backwards is being done for them. What would be fair is to abolish the rule: then we’d be really respecting them by saying ’you’re one of us now’.

Abolition would also make the tax code much simpler - something I thought all accountants and lawyers wanted until the non-dom abolition came along. After all, we have two tax laws now, wouldn’t it be better to have one? What could be simpler than that?

Well, actually, I do think we’d need a transition arrangement and a period where those temporarily here did not have to adjust all their affairs to suit the UK. I’d suggest that for the first four tax years in which a person is in the UK they might be taxed on a remittance basis. That would cover most students and work secondments, and even many from Eastern Europe who are so important in our economy right now. After four years a person has a choice: leave or stay here and become fully integrated in our system from which by then you will be getting considerable benefit. This is simple, fair, competitive, easy to explain and unambiguous. That’s a good tax.

What is being proposed is none of these things. The government’s proposals, like the domicile rule itself defeat all the logics of a good tax system that Adam Smith laid down. My proposal adheres to them. I’d recommend my system to all who thought Adam Smith got some things right.

David Harvey: How many people over the last few months have been “accused” of being non-dom in the media? Language like this really is offensive and does nothing to encourage diversity in Britain. Non-dom really means someone was born abroad and has foreign parentage. What is particularly alarming about the debate is that there are very few numbers showing what non-doms bring to the UK that’s why STEP conducted the largest ever study of advisors to non-doms which showed that many were planning to leave the UK or sending investments elsewhere. Since the study, HMRC have announced changes to the draft legislation which ameliorates the position and it is unclear exactly what effect this will have. STEP are planning a much more detailed study over the coming months which will help bring some more facts to this debate.

On top of the somewhat hostile culture that seems to have arisen the speed of the changes are alarming. STEP is working round the clock analying the details of the draft legislation and some of this stuff is about as complex as tax law gets. HMRC are then issuing clarifications and having to redraft the legislation but it’s so complex that it will be difficult to do properly in the few short weeks available. Although they are doing a heroic job on limited resources it would make much more sense to defer so that draft legislation does not have unintended consequences. Despite that I would like to thank Dave Hartnett and his team at HMRC for engaging in frank discussions with STEP.

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Shouldn’t non-doms coming from nations (like the US) with a dual tax treaty be let off any further measures? We are already taxed in our home countries. If our affairs outside the UK are further scrutinised by the UK, we will be forced to always pay the highest tax imposed by the two regimes, and never be able to take advantage of government schemes encouraging savings.
Peter Eisenhardt, London

Richard Murphy: You ignore the fact that tax is almost always levied on two bases, the source basis and the residence basis. The place where the income arises is the source and has the right of first claim on taxation. The country of residence has second stab if it has higher rates than the country of source. Internationally this is considered fair, and in fact the system of double tax treaties is designed to make sure this works and that people are taxed once and once only, albeit at the highest rate of the two. This is considered equitable the world over.

If you are resident here I can see no reason why, just because you have a double tax treaty you should be exempt from the law of the UK that applies to all other UK residents. The basis principle of democracy is that all should be equal before the law. You’re seeking to subvert that. I cannot accept that logic.

I also think it fair you should pay the highest tax rate if it happens to be the UKs. You are, after all, living here. You do not need to. You have a right to live elsewhere e.g. in the States. Most in the UK do not have that right. You made a choice, you should live with the consequence. paying tax is one of them.

Likewise government tax incentives are something that you can choose to benefit from or not. these are not principle issues, just minor market issues. I live by the principles of equity and equality before the law.

David Harvey: This is a difficult issue and potentially will cost US citizens dear because US citizens have to pay tax on all worldwide income. HMRC have explained to our lobbying team that it is not intended that the £30,000 charge will apply to taxpayers who are regarded as resident in another territory by virtue of a relevant double taxation agreement. HMRC are looking at both the position of non-treaty countries like people from Hong Kong and also the position with regards to US citizens. Along with a number of other bodies STEP has made strong representations saying that people should not have to pay tax twice.

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For the millions of self-sufficient but not wealthy foreign-born residents on limited time visas (i.e. 4 year ancestors visas or student visas), isn’t Darling’s plan to tax all money spent in the UK the real money grab? Won’t that lead these people, who, unlike UK citizens, are not eligible for any public benefits, to leave rather than be taxed twice?
Mackenzie Allan, Scotland

Richard Murphy: You are making a fundamental error of logic here. People do not pay tax for the benefit they receive. People pay tax to be admitted to the club of living in a country. The two are unrelated. And where is a money grab in asking people to pay tax on the same basis as everyone else?

But that said, I have already commented that I do think a temporary four year period should be granted to all new arrivals in the UK (but I would stress, this should happen once in a lifetime to prevent repeated such claims) so that during that period they can pay tax on a remittance basis so they do not need to reorganise all their affairs to suit the UK tax system until they have either decided a) to leave again or b) stay for longer and become full members of the club.

David Harvey: There is a real problem for students who earn money back home in the holiday which they remit to pay their way through studies over here. It remains to be seen what will happen - whether these people will leave or not - but it is important that the implications of this are really thought through.

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How much advance notice should taxpayers be given before a sea change in the basis of their taxation is brought into effect? And should the major tax treaty partners be consulted, given that double taxation may result? (By the way, there is nothing new here. See Professor Cheshire’s 1959 letter to the The Times)
Andrew Grossman, London

Richard Murphy: In principle there is no reason why notice should be given to people of a change in their taxation affairs. When a rule change is introduced to stop an abuse (and I see the domicile rule as an abuse) the shortest time possible should be given to ensure that the abuse that is being tackled cannot be retained by the taxpayer, and their advisers. In reality it has become politically acceptable to consult. I think 6 months more than ample time. I would have made it less.

I can see no reason to consult others internationally on an issue such as this. Tax is a sovereign issue, and this is an issue of a domestic taxation concession that is being withdrawn, not a matter of imposing a tax anywhere else. What should there be to consult others about?

In this case there happens to be just one such issue where consultation is taking place - but that is not because it is a taxation one. The payment of the £30,000 ’kickback’ to secure a favourable tax position is not a tax payment, it is a payment to secure non-payment of tax. This was proven in the al Fayed case on this very issue. The negotiation that this has given rise to with the US is forlorn and hopeless. Why on earth should they give tax relief on a payment that is not of tax? I make the point though only to reiterate: this is a domestic issue and no international negotiation is required.

David Harvey: Plus ca change! Certainly more than has been given in this case. This is some of the most complicated tax law on the statute book, it involves private international law conflicts, and double tax treaties as well as some arcane case law. The announcements in October hinted that certain things would happen, taxpayers waited until January to see draft legislation and then until February for further clarifications. We now all wait until March to see the Finance Bill.

Much of the new laws will take effect in early April but the Finance Bill itself may not go through Parliament until July. Taxpayers should know what taxes they are potentially chargeable and the rush into legislation now will create headaches for taxpayers and governments alike.

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What effect will the new laws have on the economies of offshore centres?
Robert Ripamonti, Crosby, Isle of Man

Richard Murphy: The change will, of course, have an impact on the economies of tax havens (they are not offshore financial centres). Many of those who are now in the UK and non-domiciled, who can avoid tax by placing their money on deposit offshore so long as they do not remit the funds back (if that can be proven), will not be paying the £30,000 ”kickback” to avoid tax payment in the future and so will no longer be able to utilise this abuse. Money will leave the tax havens of Jersey, Guernsey and the Isle of Man that are part of the BACS system as a result.

But let’s be clear. No one should cry about this. The money on deposit in these tax havens is not actually invested there. It is simply booked there. They cannot possibly use the £2 million or so on deposit for each person in their domestic economy supposedly deposited in their banks. So in fact, the cash the non-doms deposit offshore is not really there at all, it comes straight back to London, which shows what a sham the whole structure is.

The so-called ’employment’ in many of these tax havens expended in creating these charades is a cost to society, paid for out of the tax lost to society in the large democracies. The end of such wasteful activity is not a cost to society at large. The people who do these things, most of whom are not long term resident in the islands, will have to relocate and do something more useful. With the skills that these places claim to have this should be no problem for them, so I am not worried.

David Harvey: International Finance Centres like the Isle of Man, Jersey and Guernsey have a symbiotic relationship with the UK. Individuals and businesses invest into the UK through these ‘conduits’ because the costs of investment are reduced. There is a considerable amount of research showing that IFCs bring benefits to big economies like the UK. If these changes really impact on the UK economy then nobody will win.

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I could have chosen non-dom status but have not. I am middle-class and pay my taxes because I believe it is part of citizenship. Am I a fool?
Esther Phillips, Surrey

Richard Murphy: Not at all. You’re holding your head up high as a full member of the community in which you live. It’s just possible I too could claim to be non-domiciled. I am a dual passport holder. I would not dream of claiming such status.

I am proud to live in this country, bring my children up here and play my part in its life. I pay the full membership fee for doing so, and think that my duty and am happy to accept it. You’re not a fool. You’re wise.

And I bet you can sleep at night. Could you really do so if claiming, possibly with some uncertainty as to the truth of the claim, that this was not your long term home?

David Harvey: Most non-doms do not choose their status - they inherit their domicile from their father. Non-doms have always paid UK tax on their UK earnings in the same way as everyone else. Much of the debate is about capital gains that have no connection with the UK. One of the most pernicious effects of the draft legislation would have been that gains that were never brought into the UK were chargeable to UK capital gains tax. HMRC has confirmed that that was never their intention.

If the proposals undermine UK competitiveness and the economy as a whole suffers we will all lose out, including public services like schools and hospitals, as well as business.

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The archaic English law of domicile of origin depends in substantial measure on the domicile of a father and so discriminates on the basis of gender. How does this fit with the Gender Equality Duty which came into force, I think, in April 2007?
P K Wood, Hong Kong

Richard Murphy: To use the domicile law to discriminate in taxation is, in my opinion, illegal. I explain in full in a paper here (pdf).

In summary, the reason is not a gender equality issue (domicile can pass through the maternal line in the case of what is now rather oddly called illegitimacy) but because the discrimination is on the basis of a person’s national origin. This is not nationality, race or ethnicity. It is your natural home, and that is exactly what your domicile is.

It has been illegal to discriminate on this basis in the UK and EU since at least April 2003. The government is subject to the law and may not provide ’social advantage’ by reason of providing the discrimination (which it does, by granting non-dom status). The social advantage is paying less tax where the amount you can consume is a measure of social status and is increased by reduced tax payment.

I am convinced this would be the case of the issue were heard before a court. Anyone want to fund the test case?

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Can it really have been thought through that a UK day be counted if one leaves air-side when transiting in the UK? This captures those who need to change airport; those changing terminal within an airport and, insanely, smokers who are already obliged to leave the terminal to indulge. A desire to protect our health has provided a convenient smokescreen for huge duty spikes, but surely this is going too far?
Vijay, Jersey

Richard Murphy: I too think this one is absurd. Transit through the UK cannot count as a day here, in my opinion.

I also think it absurd that days of arrival and departure will count. If I arrive at 11am Monday and leave at 7pm Tuesday I will have been here for 32 hours and one night. That is not two days however measured.

A day of arrival should count, or a day of departure should count, but not both. And a day where you arrive and depart should not count at all. If anyone is then sad enough to commute in daily they are just that - very sad.

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Questions on the principles of non dom taxation

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Can a non-dom switch between paying the £30,000 fee and world-wide tax from year to year?
Edward, London

Leonie Kerswill: Yes, the intention is that this will be an annual choice for the taxpayer.

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Will the new rules apply after 7 calendar years of UK residence, or after 7 tax years of UK residence? If an individual arrived in the UK at the tail end of a tax year, the latter could accelerate the application of the new rules.
Alex, London

Leonie Kerswill: The rules are in terms of tax years , not calendar years. You need to look to see if you have been resident in tax terms for seven out of the previous nine tax years - if so, the eighth year of residence out of ten means you are in the £30,000 ’net’. And in counting these years, part years can count as a full year’s tax residence - so being here for 90+ days each year could be sufficient to bring you into the charge.

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I’m trying to understand the U-turn from the Treasury [LINK] regarding world wide taxes for non-doms. Are they now saying that income or gains, made in other countries after 5th April and not brought into UK, are not subject to UK taxes?
Paul Kane, Oxfordshire

Leonie Kerswill: No, they haven’t gone that far! In many ways, to call what was announced last week a ’U turn’ is rather overstating it - it was called a ’clarification’ and that’s about all it was. It was helpful in saying that the new rules won’t apply retrospectively to the extent that some feared, although we need to see the revised legislation to be sure of what is happening.

It certainly hasn’t said that they are dropping the idea of taxing income and gains made by non-doms outside the UK. If those are remitted they’ll be taxed here, and if instead the non-dom goes for the arising basis and is taxed on all their worldwide income and gains, it’s all in the UK tax net.

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Will off-shore trusts, with relatives of the non-dom as beneficiary, still provide a way for capital and capital gains not to be taxed as if remitted automatically?
Paul, Manchester

Leonie Kerswill: If what you are getting at is paying something out of a non-resident trust to a beneficiary who stays outside the UK then the answer is probably yes. If, though, a payment is made to the spouse, or other close relative, of the non-dom, who is resident in the UK then the remittance basis would probably catch the payment as if it had been made to the non-dom directly. So this is an area for considerable care.

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If a non dom elects to be taxed on his worldwide income as of 2008, will capital gains on shares be calculated based on acquisition value or on value as off April 6 2008?
Freddy Deman, Kent

Leonie Kerswill: There doesn’t seem to be any basis for this in the legislation - it means that if a non-dom makes a disposal post-April, it is calculated in the normal way with the cost being whatever it actually was. That does of course mean that there is an element of retrospection in this - with gains accrued pre-April being taxed here post-April

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It’s been widely suggested that a minimum threshold of offshore assets (say 1.5m) and associated income is required in order to make paying the 30k worthwhile. Assuming you do not have the 1.5m, is it possible to parcel up offshore assets into an investment that only pays out after a number of years and then only claim non-domicile status (for income and capital gains tax purposes) periodically - say one year in 5?
Jonathan Robinson

Leonie Kerswill: If your investment does not pay out income then you should come under the £1,000 de-minimis limit - in which case there is no need to claim the remittance basis. When you eventually sell the asset, or income is paid out then if you re still UK resident at that time you can decide whether the payment of £30,000 is appropriate.

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If a resident non dom presently has works of art in his private home which were imported from outside the UK and paid for out of foreign income/gains does he risk a tax charge under the new rules if the works of art remain in his private home after 5th April 2008?
E A McGregor, Monte Carlo

Leonie Kerswill: At the moment our understanding is that there will only be an issue if the work of art is sold in the UK or is taken out of the UK and brought back in again after 5 April.

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Under current proposals will a non-dom who has been in the UK for over seven years be able to close an offshore capital account before the end of this tax year and transfer the accrued interest to the UK in the next tax year, without incurring tax on the interest and without paying the 30k per annum tax levy?
Victor Barendse, Reading

Leonie Kerswill: We assume that you are referring to the practice commonly known as ’source ceasing’ - which allowed what you are suggesting to work. However, HMRC sees this as an anomaly that it wants to close. So it wouldn’t work after 6 April, even if you have closed the account before then.

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Being a Dutch non dom and not a millionaire, I wonder what pension fund should I transfer my investments into avoid paying the £30,000 annually (an amount which is approximately my annual income).
Lia van Bekhoven, Twickenham

Leonie Kerswill: The £30,000 charge doesn’t automatically apply - you have a choice whether to pay that or just pay UK tax on worldwide income. And if there is less than £1,000 of overseas income, you can pay tax on UK income only without worrying about the £30,000. If you were to put more of your income into your pension fund, in principle that is tax deductible (subject to the usual rules) but whether that is the right route depends on what your general situation is.

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As I understand it, capital brought into UK will be subject to taxation. Will taxes apply to funds transferred to the UK from an off-shore non-interest bearing account, i.e. amounts that logically are not income?
Rauf Asadov, Azerbaijan

Leonie Kerswill: Assuming the capital in the account doesn’t relate to income (or capital gains) made since you became UK resident, then you should be OK on this. But it does mean that you need to take quite a lot of care over identifying the sources of the original funds in the account.

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My son has a green card and has worked in the US until the start of 2007, when he went to England to study. He has some savings in the US (about $10,000). At Cambridge he is getting a tax free scholarship of about £12,000 pa. What is his tax position in the UK?
David Schlachter, Chicago

Leonie Kerswill: He will be tax resident in the UK so taxed on UK earnings (such as those from a part-time job). The £30,000 charge won’t be relevant for him until he has been here for seven years. However, what may catch him is that if he wants to use the remittance basis – i.e. not be taxed on any non-UK income and gains he has unless he brings them here - then he will lose his UK personal income tax allowance and capital gains tax annual exemption. That operates from day one of a non-dom’s being here, not after year seven. The exception to this is if the overseas income is under £1,000 when he’ll be able to keep his personal allowances and still operate the remittance basis. It is not clear how the tax authority is going to manage this loss of personal allowances for the low paid and students.

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