Non-doms: the £50,000 passport to tax relief

THE BUDGET ANNOUNCEMENT on non-domiciled individuals in the UK was supposed to mark the end of the row over their status.

Chancellor George Osborne announced that non-doms who have been resident in the country for more than 12 years will have their remittance basis – the fee they are charged to prevent them paying tax on worldwide income – increased to £50,000 from £30,000.

They were also given some treats by the chancellor: non-doms will be allowed tax-free remittance for investment in businesses that are “carrying out trading activity” or “undertaking the development or letting of commercial property”. Perhaps most importantly, Osborne announced: “To end the speculation and uncertainty and to provide stability, I confirm that I will be making no further changes to the taxation of non-domiciles in this Parliament.”

However, it looks as though there is less certainty over the Treasury’s figures than there will be for non-doms. The consultation published this month fleshed out these proposals and provided some figures. However, a parliamentary answer from Exchequer secretary to the Treasury David Gauke slightly contradicted those in the consultation document. So how attractive will the remittance charge be? And will it be beneficial at all to the Exchequer?

The figures certainly make interesting reading. The consultation document claims that an estimated 3,500 individuals will choose to move to the “arising basis” – paying tax on all worldwide income instead of paying the remittance charge – in 2012-13. However, Gauke wrote on 15 June in an answer to John Redwood MP that there would be an estimated 7,400 people paying the remittance charge in 2011-12, rising to 9,600 people in 2012-13, an increase of 2,200.

Therefore, the Treasury expects 3,500 people to move to the arising basis, yet a 2,200 increase overall in people paying the remittance charge. This suggests that it expects 5,700 new people to pay the remittance charge in 2012-13. Do these figures stack up?

The number of people paying the remittance charge in 2008-09 – the first year – was 5,400. This became the estimated 7,400 in 2011-12. Having seen a net rise of only 3,000 people paying the remittance charge in three years, it seems optimistic there will be 5,700 new people willing to pay the fee, especially considering 3,700 non-doms will have to pay the £50,000 charge.

“There is clearly some arithmetic going on but they are going in opposite directions”, Alex Henderson, a partner at PwC, says. “I would be surprised if there were a sudden influx of people who want to pay this tax. There seems to be a few assumptions; nobody has precise information about what the number will be at the end of the day and it must be speculation.”

Stab in the dark
The Treasury has admitted that the figures provided in Parliament were wrong since this article was published. However, this will, of course, still affect some individuals to the tune of £20,000 each. And much of the benefit to the Exchequer will depend on their willing to stay on the remittance basis and not move to the arising basis or, in the worst case, leave the country.

The consultation document says: “It is expected that the higher charge will be paid by long-term resident non-domiciles who have overseas income and capital gains of at least £100,000 in a tax year”. The government justifies this policy decision because it “believes that those who have been here the longest, enjoying the benefits offered by the UK’s economy and society, should make a greater contribution than the current £30,000 charge to reflect their closer connection to the UK”.

The policy will yield around £80m a year, according to the consultation document; this compares with the Budget book, which puts the yield at £110m in 2013-14, £70m in 2014-15 and £50m in 2015-16.

These are not particularly significant sums in the grand scheme of things. But are they still optimistic figures? David Kilshaw, chair of private client at KPMG, says that the Treasury’s move is unlikely to raise significant revenue. “It is perhaps more a symbolic gesture to demonstrate that non-dom individuals are contributing their fair share to the Exchequer,” he says. Politics, not revenue raising, is the driver behind this.

The politics are, of course, important. Non-doms receive poor press and the public has raised concerns that overseas nationals receive and benefit from tax breaks. It should not be forgotten though that, even with the increased remittance basis, non-doms are better off from a UK tax perspective than UK-domiciled individuals in exactly the same position. The £50,000 charge is optional and someone will only pay this if it saves tax over the year, otherwise they have the option to be treated as a UK domicile. Actual UK domiciles, of course, do not have this choice and those in the UK must pay tax on all worldwide income.

Osborne’s announcement that this signals the end of changes to the non-dom regime suggests that the government values the presence of overseas nationals. Those that fall between the two stools of currently paying the £30,000 charge but losing out when this increases to £50,000 have an extra incentive to move to the arising basis; the Budget and the consultation document sugared the pill.

Fresh benefits
Under the new rules, individuals will be allowed tax-free remittance for investment in businesses that are “carrying out trading activity” or “undertaking the development or letting of commercial property”. The consultation says the government “recognises that non-domiciles often want to invest in commercial property” and its conclusion “will broaden the appeal of the incentive”. There will be certain exclusions for holding and letting residential property as some people could abuse this through using it to buy property in which they live, the consultation states.

Mike Warburton, tax director at Grant Thornton, says the measures are “generous in the way they allow investment into the UK”. He adds that they “might even encourage newspaper moguls to put money back into the newspapers”.

With all this in mind, even though the Treasury was wrong in claiming that 5,700 extra people will decide to pay the remittance basis, it will probably not be too concerned. This has been a political minefield for successive governments: finding a middle ground between a public that does not want wealthy overseas nationals to benefit from the UK while being given tax breaks; and a belief in government that wealthy overseas nationals provide an overall good to the economy.

This does seem an easy truce. The government will hope that it retains the individuals who invest in the UK but, perhaps most importantly, ministers will hope that it keeps non-doms off the front pages of the newspapers that they might be putting their money back in to.

Revisions have been made to the original article