Glance at the list of the richest people in the UK and you will spot a trend. Many of the most prominent British millionaires and billionaires, such as Roman Abramovich or Lakshmi Mittal, were either not born here or do not spend much time in the country.
It is easy to argue that the riches of this illustrious and colourful group of tycoons arise from ingenuity, toil and perhaps a smidgeon of luck. But if you suffer from bouts of schadenfreude, you might want to consider the argument that their wealth turned into tens of millions more quickly than yours for another reason: they received more favourable tax treatment.
Accountants estimate that most of the billionaires at the top end of The Sunday Times rich list are either non-domiciled or non-resident in the UK for tax purposes.
When it comes time to pay taxes, the issue of whether you are domiciled inside or outside the UK and whether you are a UK resident is important.
If your father was domiciled outside the UK, you automatically enjoy “non-dom” status, although this can be lost if you make the UK your permanent home. Acquiring this label can save you thousands of pounds in taxes each year since even if you are UK resident for tax purposes, if you are a “non dom” you do not have to pay tax on overseas income provided it isn’t remitted into the UK.
The same standards apply to non-UK residents; however, “non doms” can gain the added advantage of their wealth not being subject to UK inheritance tax on death. As a result, scores of British-born millionaires and billionaires have flown the coop to tax-friendly havens such as Monaco and Malta in pursuit of non residency or even “non-dom” status.
“Either being a non-resident or a non-dom is extremely helpful,” says Mike Warburton, senior tax partner at Grant Thornton. “If my clients have either label, I can in practice help them avoid paying tax on anything but earnings sourced within the UK.”
In the past five years, more Britons have put changing their domicile and residency at the top of their agendas, advisers report. Scores of people in the UK are emigrating, often in search of sunnier climes but sometimes also to change their tax status. When they leave for sunnier shores, many look to change their residency and sometimes also their domicile status to lower their tax burdens.
“There is more interest now in changing your domicile than there was several years ago,” says Catriona Syed, a partner at Charles Russell, the law firm. “It’s much easier to leave the UK than it used to be. Almost anyone can buy a house in France for a reasonable amount of money and people feel that taxes in the UK have become quite onerous.”
Jeffrey Cohen, head of private client tax at Davenport Lyons, another law firm, agrees: “In a relatively short period of time, the question of domicile and residency has become a major area.”
The case for fighting to lose your UK domicile status is compelling: the main benefit of doing so means that, on death, your overseas assets may avoid UK inheritance tax, which is levied at 40 per cent on all worldwide assets over the nil rate band (currently £285,000).
But, while the argument for changing your domicile is persuasive, embarking on such an endeavour is challenging. Altering your domicile requires far more proof that you have severed ties with your homeland than simply changing your residency status, accountants say.
“To have a domicile somewhere you have to show you have moved to another place permanently or indefinitely cast off all of your ties with your country of origin. The onus is on the taxpayer to prove it,” Grant Thornton’s Warburton says.
If you have brothers, sisters, a wife or cousins who still live in the UK or assets remaining in the UK or even if you still support a Premier League team and fly back for games, the government could call your domicile status into question, accountants say.
This is particularly true following a ruling last week by the Special Commissioners, which adjudicates on high-level tax disputes. Under the ruling, a British-born businessman based in the Seychelles lost a key legal battle over his domicile. The court ruled Robert Gaines-Cooper owed thousands of pounds in back taxes as his ties with the UK were too strong to claim his domicile elsewhere.
Under the ruling, the Special Commissioners argued Gaines-Cooper had closer ties to the UK partly because his wife resides here and partly because of the time he spent each year in the UK.
“The case highlights the risk of seeking to push the taxman too far,” says Tim Gregory, a partner at Saffery Champness, an accountancy firm.
Revenue & Customs wants to contain the rising tide of Britons living outside the UK who are looking to limit their tax burdens and this puts “tax exiles” who have changed either their residency or are not domiciled here at risk, accountants say.
For individuals looking to change their domicile or residency status, accountants say it is far easier to switch your residency than your domicile.
“Residency is about where you are actually living,” says Paul Knox, wealth adviser at JP Morgan’s private bank. “So, it’s just a matter of spending time in a particular country to lose your residency status.”
As long as you live outside the UK for three years and do not return for more than 90 days on average per year, becoming an ordinary non-resident is a relatively easy process. The fringe benefits are numerous. If you live outside the UK for five years as a non-resident, you don’t have to pay capital gains tax on UK investments. If you are a non-resident for three years, you can avoid paying income tax on overseas income. A third attraction is that with the help of an offshore bank account, you can avoid paying income tax because it is no longer UK sourced income.
“For income tax purposes, you are technically still caught for UK-sourced income, but in practice you don’t have to pay any as you would stick it in a bank account in Jersey,” Warburton explains. Setting up an offshore trust is fairly simple. Cohen of Davenport Lyons estimates that his clients spend from £3,000 to £5,000 in yearly management and set-up fees. “The price depends on the level of ‘control’ the client wants over those trust monies,” he says.
One final perk non-residents receive is that any dividends received from a UK company would not be taxable whereas UK residents pay tax on all overseas and domestic earnings. Accountants and advisers stress that pursuing this route is probably the simplest way to lower your tax bill.
In contrast, most agree that trying to change your domicile can be something of a Sysiphean task and the risks that the government might call your status into question are high, particularly given the level of scrutiny tax exiles are now under.
Unless you are particularly committed to the idea that you do not want your heirs to pay inheritance tax on your worldwide assets upon your death, altering your residency status is a much simpler arrangement than trying to persuade the HMRC that you are no longer domiciled inside the UK, they say.
“To change your domicile, you really have to be committed to the idea that this new country is the place where you intend to be forever,” says Paul Knox of JP Morgan. “You have to commit to the idea that you’ve left the UK forever.”
