Memorandum by the Society of Trust and
Estate Practitioners (STEP)
RESIDENCE AND DOMICILE
1. KEY
POINTS
After a leisurely consultation process the speed
and intensity with which the Government introduced measures targeted
at non-doms and their investments has left this important part
of this country's business community feeling uncertain and unwanted.
Reputations are slowly built and quickly destroyed.
STEP welcomes statements from HM Treasury and in particular the
Chief Secretary to the Treasury highlighting the positive role
that non-doms play in the UK economy. The more Ministers make
these statements the quicker the reputation of the UK as a destination
for foreign investment will be repaired.
STEP also welcomes the industry engagement by
HMRC following the outcry triggered by the hastily drafted proposals.
This has resulted in a deepened dialogue between STEP and HM Government.
— Non-doms pay UK tax once money comes
to the UK, ie is remitted. Non doms pay at least £7.1 billion
in tax.[3]
— Non-doms bring significant inward
investment to the UK.
— The UK tax system is not peculiar
compared to the rest of Europe—other countries also compete
for foreign investment.
— Media reports suggest that uncertainty
around the Government's proposals is causing damage to the UK
economy.
2. NON-DOMS
PAY UK TAX
ONCE MONEY
COMES TO
THE UK, IE
IS REMITTED.
NON-DOMS
PAY AT
LEAST £7.1 BILLION
IN TAX
Non-doms bring between £65 and £80
billion in Foreign Investment[4]
and spend £16.6 billion per year on goods and services in
the UK.[5]
The new remittance rules contained in the Finance
Bill (the rules that govern when money or property is brought
into the UK for tax purposes) mean that the UK will remain competitive
as a destination for foreign capital, which brings over £100
billion into the UK economy per year.[6]
According to a report by Think London, an organisation
funded by HM Government, foreign investors are responsible for
more than a quarter of London's economy and 13% of its jobs. Between
1998 and 2004, foreign investment produced approximately 42% of
London's economic growth.
At a time when UK companies are finding it harder
to raise capital on UK markets stability of the tax regime and
therefore of incentives for foreign capital to come to the UK
are maintained.
STEP shares the Government's stated desire of
developing a working system which introduces greater equity into
the system but maintains the UK's competitiveness for attracting
foreign direct investment.
3. THE TAX
REGIME FOR
NON-DOMS
UK resident foreign domiciliaries already pay
£7.1 billion in UK taxes. As the tables below show, resident
non-domiciliary (RND) individuals and settlors of non-UK trusts
pay UK taxes on income, gains and inheritances when they arise
or are brought to the UK. These changes will see both wealthy
and less wealthy non-doms pay more in tax.
TAXES PAID BY THE INDIVIDUAL NON-DOM
| Status | Pay Income Tax?
| Pay Capital Gains Tax? |
Pay Inheritance Tax? |
| On UK
Income
| On non-UK
Income | On UK
gains
| On non-UK
gains | On UK
assets
| On non-UK
assets |
| Individual RD | √ | √
| √ | √ | √
| √ |
| Individual RND | √ | X unless remitted
| √ | X unless remitted |
√ | X unless deemed domiciled
|
| Individual NRND | √ (some income exempt)
| X | X | X |
√ | X |
| NB: 1. Table relates to investment income and gains
| | | |
| | |
| 2. RD means resident and domiciled in the UK, RND means resident non-domiciled, NRND means not resident and not domiciled in the UK.
| | | |
| | |
| | |
| | |
|
TAXES PAID BY SETTLORS OF OFFSHORE TRUSTS
| Status | Pay Income Tax?
| Pay Capital Gains Tax? |
Pay Inheritance Tax? |
| On UK Income | On non-UK Income
| On UK
gains | On non-UK gains
| On UK
assets | On non-UK assets
|
| Individual RD | √ | √
| √ | √ | √
| √ |
| Individuual RND | √ |
X unless remitted | √ | X unless remitted
| √ | X unless deemed domiciled
|
| Individual NRND | √ (some income exempt)
| X | X | X |
√ | X |
| NB: 1. Table relates to investment income and gains
| | | |
| | |
| 2. Ordinary residence is ignored |
| | | |
| |
| | |
| | |
|
4. OTHER COUNTRIES
OFFER SIGNIFICANT
INCENTIVES FOR
NON-DOMS
Other countries within and outside the European Union compete
with the UK in offering tax incentives and schemes to attract
foreign capital. They do so because they believe that spending
and investment in their countries by foreigners and foreign companies
provides a substantial and justifiable benefit to their economies.
Netherlands
In recent years a number of amendments have been made to
the Netherlands tax code:
— Under the Netherlands tax code, a Dutch "holding
company" that owns "at least 5%" of the value of
the paid-in capital in another foreign or domestic company from
the beginning of the fiscal year can receive dividend distributions
from this "subsidiary" 100% tax free.
Ireland
Ireland has a similar set of rules to the law in UK prior
to the Finance Bill 2008. This makes Ireland an attractive destination
for foreign capital and individuals.
Belgium
Belgian holding companies that hold a participation in other
companies can exempt 95% of any dividend received from such companies
provided the other company is not located in a country that (1)
does not tax corporate income or (2) which has a tax regime, which
is substantially more favourable than that in Belgium.
In addition, capital gains from the disposition of participation
shares are 100% tax free from the 1992 tax year onward.
Dubai
Amongst the incentives offered to companies operating within
the Jebel Ali Free Zone and the Dubai International Finance Centre
are:
— Corporate Income Tax: No corporate income tax
on profits. The exemption is for a period of 15 years with a guarantee
of an extension for a further 15 years in the event that corporate
income tax is introduced in Dubai. Currently only banks and oil
companies are assessed for corporate income tax in Dubai. The
key difference with companies operating in the Jebel Ali Free
Zone is the guarantee of exemption in the event that corporate
income tax is imposed by the Government.
— Withholding Taxes: No withholding taxes.
— Import Duty: Exemption from all import duties
on goods imported into the free trade zones. For all other imports,
duties have been largely standardised at 5%.
Other
Several other states offer regimes designed to attract inward
investment based on low or zero tax rates or exemptions for foreign
capital.
— The USA does not tax foreign shareholdings of
a US company.
— In India, as of 2008, equities are considered
long term capital if the holding period is one year or more. Long
term capital gains from equities are not taxed. However short
term capital gain from equities held for less than one year is
taxed at 15% (increased from 10% to 15% after their Budget 2008-09).
This is applicable only for transactions that attract Securities
Transaction Tax (STT).
Conclusion
These states are not "tax havens". The Netherlands
is the archytype of the European social model yet it provides
significant incentives to attract globally mobile capital from
abroad. The incentives on offer take very different forms and
will not be an attraction to all investors but they provide a
significant draw for foreign capital from individuals in different
circumstances.
5. RUSHED CHANGES
HAVE CAUSED
UNCERTAINTY AND
REPUTATIONAL DAMAGE
Following a lengthy process of consultation on the domicile
regime (since at least 2002), the timetable was suddenly truncated
in October 2007.[7]
This meant that policymakers in HMRC and HM Treasury were
forced to work too quickly with extremely complicated draft legislation
and the changes eventually announced, particularly in draft legislation
in January, bore every indication of being rushed. The planned
draft legislation had to be significantly amended, as indicated
in letters, FAQs on the HMRC website, and comments in meetings
with the Acting Chairman of HMRC. People need to be able to understand
their tax position from actual legislation.
All this has damaged Britain's reputation as a destination
for investment with a stable fiscal regime. As the clauses on
residence and domicile took effect on or before 5 April 2008,
it was important for taxpayers to understand their tax position.
Even though the retrospective provisions in the draft legislation
have been ameliorated, the uncertainty created by the provisions
has already caused many non-doms to consider their position as
investors or residents in the UK.
Even at this stage HMRC anticipates significant amendment to the
Finance Bill.
6. CONCLUSION
The new remittance rules in the Finance Bill (the rules that
govern when money or property is brought into the UK for tax purposes)
mean that the UK will remain competitive as a destination for
foreign capital bringing over £100 billion into the UK economy.
Resident non-domciliary (RND) individuals and settlors of
non-UK trusts pay UK taxes on income, gains and inheritances when
they arise or are brought to the UK. UK resident foreign domiciliaries
already pay £7.1 billion in UK taxes. The changes in the
Finance Bill will see both wealthy and less wealthy non-doms pay
more in tax.
Other jurisdictions see the value of the wealthy and their
investments and provide significant incentives for non-doms to
move to or invest in their countries. These countries are competing
with the UK for the foreign capital of non-doms.
A process of consultation on the domicile regime stretching
over many years was suddenly curtailed, leading to rushed changes
that have damaged Britain's reputation as a destination for investment
with a stable fiscal regime.
April 2008
These HM Treasury figures corroborate estimates made by the
Chartered Institute of Taxation. http://www.tax.org.uk/attach.pl/6231/7215/ForeignDomsResidence%20final201107.pdf
On this basis, our experience is that there are perhaps 50-60
organisations which offer trust services on what might be described
as a "systematic" basis (ie ignoring the "boutiques"
which may administer only a handful of trusts). These larger organisations,
in our experience, will usually have a "book" of anywhere
between 100 and 1,000 trusts, with an average perhaps being around
the 300-400 mark.
This would suggest that there are between 15,000-25,000 such
offshore structures. A few such structures may exist for UK domiciliaries,
but these are increasingly rare since tax changes in 1991 and
1998 and do not form a significant part of the total.
This figure would broadly tie in with the 15,000 figure which
HMRC gives for those who claim the remittance basis on their self-assessment
returns and who have unremitted income in excess of £75,000
(thus making the £30,000 charge worthwhile).
Such offshore structures are, in our experience, rarely cost-effective
to manage where assets are less than around £1 million. CIOT
estimated the median size of a non-resident trust fund to be in
the region of £4-5 million. This would put the bottom end
of the estimates for the sums held in non-UK trusts at £60
billion and the upper band at £125 billion. CIOT then estimate
that around 50-75% of these funds would be invested in the UK.
3
In the tax year to end April 2006 non-doms who filed self assessment
returns paid £3.9 billion in Income Tax. Research by Stonehage,
a wwelath management company, suggests that the average proportion
of VAT to income tax receipts over the last seven years has been
57%. There is no reason to believe Non Doms as a population sample
pay a significantly different proportion (if anything they are
likely to pay more). In the tax year ended April 2006 the average
tax paid by non-doms was £34,210 compared to the UKU national
average of £4,250. Back
4
HM Treasury estimates contained in the following document:
http://www.hm-treasury.gov.uk/consultations_and_legislation/residence_domicile/consult_residence_domicile.cfm
show that foreign source income for non-doms is in the region
of £65 and £80 billion. Back
5
Research by wealth management group Stonehage conducted in
2007 suggests that Uk resident non-domiciliaries spent £16.6
billion in the UK in 2006 excluding housing and non-VAT items.
This figure is reached by calculating what the sum of spending
was that yielded VAT receipts ie. 100% of the 17.5% of VAT. Back
6
This figure is arrived at by adding up the Foreign Source Income
estimates, the annual spending figures from 2006 and the tax receipts
from non-doms. Back
7
A Law Commission paper -was issued in 1985. A review of the
taxation of non-doms was first announced in the March 2002 Budget
and again in the Pre-Budget Report in November 2002. A background
paper was issued April 2003; and non-doms were again addressed
in the pre-Budget Report in December 2003 and the Budget "Red
Book" Report in March 2004. Concrete changes were announced
in the Pre-Budget Report in October 2007 and draft clauses published
in January 2008. Back
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