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The UK’s “non-domicile” tax regime and Labour’s desire to end it

The Labour Party has stirred up the usually rather complacent wealth management sector in the UK by vowing to end the so-called “non-dom” system under which a foreigner who wants to spend some time in the country can avoid paying tax on all his/her worldwide income and capitals gains so long as this money is kept outside the UK. If such a non-dom has lived in the country for seven years, they must pay an annual levy and depending on the duration, that annual levy is as high as £90,000. A study by University College, London, published in 2013, concluded that the system brought in more revenue for the UK than was being lost by the absence of such a system.

At face value, the non-dom system might look like a great deal for a person who is worth tens of billions of pounds, dollars or whatever and who “only” pays several thousands per year to live in the UK. But if such a person’s wealth has been largely generated outside the country and is kept outside it, what is unfair about this position? If Mr Stinking Rich brought those billions to the UK, he would have to pay a thudding great tax bill. Ed Miliband, leader of the Labour Party, must know that, or if he doesn’t, he is being reckless. The whole idea that a person should pay tax to the country of his/her birth regardless of having not lived there for a period – as is the case with the odious worldwide US tax regime – cuts against the idea that one should pay taxes that focus on where you actually live.

Matthew Sinclair has a good piece here on the issue.

From a point of narrow party politics, I suppose Ed Miliband and his colleagues think they are being clever at playing the class war card and hope to trap opponents by having to defend the non-dom system. I notice that whenever a weapons-grade knob such as Miliband makes such a crowd-pleasing proposal, it is seen as a “trap” and that therefore the other side are told that it isn’t wise to oppose it. But this sort of cowardice-as-a-tactic approach merely favours the bully. A braver, and ultimately better, argument is to state that it is in the UK’s interest to encourage internationally-minded investors and entrepreneurs (so long as they are not criminals and jihadi nutcases) to come to the UK and enrich themselves and everyone else. To pander to the zero-sum, dog-in-the-manger mindset of Miliband and others is also foolish.

There is also a broader point to be made here: such attacks represent, at the margins, part of a rollback of globalisation, of the free movement of capital and people, a process from which London, as a global financial centre, has been a mighty beneficiary.

Far too many people in the banking and financial markets more broadly have fought shy of voicing their concerns about the demented nature of so much “banker-bashing” and attacks on inequality recently. Consider the respect granted to Thomas Piketty’s fatally flawed claims about inequality and his call for draconian taxes on capital. It is sometimes stated – I heard such a statement recently at a gathering – that “neo-liberals” (ie, classical liberals) have “won” the argument and that we now need to move on. How complacent that is. The arguments for freedom and capitalism are being lost in the UK, or at the very least, they aren’t being made very effectively.

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35 comments to The UK’s “non-domicile” tax regime and Labour’s desire to end it

  • I have no problem with Milipede removing the concept of domicile from UK Tax Law as it is an outdated concept that has no place in the modern world.

    Many UK expats, who are far from millionaires (mostly just retired people in their 60’s and 70’s), get dragged into this whole domicile bullshit because they choose to retire somewhere sunny, but HMRC still has its hooks in their backs as they are deemed to still be UK Domiciled even though they may not have lived their for decades.

    However, knowing Milipede the back-stabbing mumbler, I doubt that he would be as clear thinking as that and will upwardly-price the advantages of non-doms (those Russian oligarchs and the like living in London), while retaining the downsides (IHT traps for middle-income pensioners)

  • Jim

    Given that the UK has dual taxation treaties with over 100 other nations, wouldn’t the abolition of non-dom status generate very little extra revenue, even if every non-dom stayed in the UK? OK, there would be people who were paying very little tax on income generated in countries with lower income taxes than the UK, but thats not going to be massive.

    Really non-dom status is not to do with tax avoidance per se, more about saying to uber-wealthy foreigners, come here, spend your money in the UK, and we won’t make you prove to us what income you had and tax you’ve paid everywhere else in the world. It just makes things simple for them to come here, to live and spend money. If the abolition meant documenting to HMRC every year all your worldwide income and tax paid, people would leave, even if the result was no more tax due. The hassle factor, plus the cost of accountants/lawyers etc would mean it wasn’t worth the candle to be here. Better to go somewhere you’re wanted.

  • Mr Ed

    the concept of domicile from UK Tax Law as it is an outdated concept that has no place in the modern world.

    The concept of domicile was described to me as ‘attachment to a legal system’, so a legitimate child with a Scottish father is saddled with Scottish domicile unless domicile alters by marriage or election. Domicile does not involve just tax, it involves, for my example, the joys of fixed rights as to the inheritance of your estate as well. A chap I knew ended up advising a Scotsman, who wished to disinherit his son entirely, to move to England and abandon his Scottish domicile.

    Still, if inheritance taxes were to go, domicile would matter less. And Mr Miliband certainly knew about Inheritance Tax on his father’s house and how to avoid it.

    The point of this policy is to make a Class War noise. A bit of post-Election robbery or pre-Election flight would be a bonus for the Labour Party.

    As someone said elsewhere, the only people actually getting undesirables out of the UK appear to be ISIS.

  • Gareth

    Jim said:

    It just makes things simple for them to come here, to live and spend money.

    It’s a pity the politicians aren’t pushing to extend non-dom rules to the rest of us.

  • TDK

    The problem Jonathan ,is not just that the counter arguments are not made, it is that the counter arguments should have been made far earlier in the electoral cycle. To take three examples: 1. the idea that “this” is austerity is absurd on every level and should have been nailed by Cameron long long ago. 2. Zero hour contracts will not be converted into “normal” jobs, rather the jobs will largely disappear. 3. Tax evasion and tax avoidance are not the same thing – people are not being prosecuted because they haven’t broken the law.

    Simple messages repeated ad nauseum, force the argument back onto Labour whereas the isolated statement by Boris Johnson et al just looks like excuses at this point in the cycle.

  • Given that the UK has dual taxation treaties with over 100 other nations, wouldn’t the abolition of non-dom status generate very little extra revenue

    Most Double Taxation Treaties deal with income tax rather than inheritance tax. The only DTT’s with inheritance tax provisions are Ireland, South Africa, USA, Netherlands, Sweden and Switzerland.

    So, those UK non-residents that HMRC deemed to remain UK Domiciled and live outside the countries listed above (prime examples being France and Spain, home to vast numbers of expats) would still be subject to inheritance tax upon their estates when they die.

    As for those resident, but non-domiciled in the UK, the very fact that they have substantial wealth and are internationally mobile means they are in the UK because they wish to be. If the costs of being resident, but non-domiciled here exceed their tolerance (and this differs according to taste), then they could (and I suspect would), just pack up and leave.

    Non-domiciled status not only affects billionaire oligarchs, but also movement of staff within international corporates. It is unlikely that London would have become the international finance centre that it has become if it wasn’t for non-domicile relief. I mean what trader in his right mind would give up New York for London if the difference in taxation wasn’t mitigated? Precious few I would imagine.

  • I mean what trader in his right mind would give up New York for London

    I did 😉

  • Mr Ed

    TDK:

    1. the idea that “this” is austerity is absurd on every level and should have been nailed by Cameron long long ago.

    I agree, but what is truly absurd is the Conservatives’ own claims that they are implementing austerity when they are not. Mr Osborne couldn’t cut himself shaving. The sheer idiocy of doubling the National Debt and claiming that you are making cuts is self-evident, but the Conservatives boast about non-existent cuts, whilst increasing spending, and have always been happy to sit in Labour’s shadow, holding office but not power.

  • @Mr Ed:

    I think most economists would be happy if the Tories would just balance the books, which they probably will to some degree during the next term if they are lucky enough to get elected. There were never an real cuts or indeed even a genuine attempt at them, they just held back the increases until the growth of the overall economy delivered what appears like a reduction. Those aren’t cuts because the version of Blue Labour that is in power at the moment does not have the stomach for cuts.

    Labour perennially spend money like its going out of fashion whenever they are in power and with a Labour/SNP coalition – even more so.

  • Non-domiciled status not only affects billionaire oligarchs, but also movement of staff within international corporates. It is unlikely that London would have become the international finance centre that it has become if it wasn’t for non-domicile relief.

    A few countries have reduced taxation for “impatriates” for the first 5 years or so of an employee being assigned to a new location. I don’t pay the full tax rate in France for example, and the same would apply in Denmark AFAIK. So the effect of non-dom status could easily be replicated.

  • True enough Tim – I’ve just spent a big chunk of the last year under the Dutch version, which was only introduced because they couldn’t get foreigners to come to the Netherlands because of the high taxes there.

    Certainly the UK could remove the concept of Domicile and replace it with something else, but that is not what I am hearing from back-stabbing Ed, just the vague mumblings of non-Doms are tax dodgers so we’re going to abolish it.

    @Perry:

    I mean what trader in his right mind would give up New York for London

    I did 😉

    So you’re not UK domiciled then?

  • So you’re not UK domiciled then?

    I am now, but that was not always true.

  • Mr Ed

    JG ‘back-stabbing Ed‘?

    Nit-picking I will admit to, on an epic scale. 🙂

  • Nit-picking I will admit to, on an epic scale.

    Unless the “Mr. Ed” in your nom-du-guerre refers to “Edward Samuel Miliband MP for Doncaster North” rather than a famous TV Celebrity and talking horse then I was not referring to you. 🙂

    If you are the MP for Doncaster North then I think “Back-stabbing mumbler” is an appropriate epithet.

  • Mr Ed

    Sorry, mistaken ID. I have met Mr M. He is much taller than you might think. He just looks runty.

  • I have met Mr M. He is much taller than you might think. He just looks runty.

    I had a nice chat with Peter Mandelson at a BP function at Grocers Hall one Christmas. He was very nice and I still had my soul after I’d finished talking to him. There was a strange smell of sulphur though.

    For myself, I have no issue with these people personally, but when they put themselves forward for political office then they voluntarily put themselves under the microscope.

    Should the way Ed Miliband speaks or eats a bacon sandwich make any difference to anyone? No not really, but the fact that he’s a self-confessed Marxist, acts as a union stooge and stabbed his brother in the back to get the leadership – that shit matters to me.

  • Snorri Godhi

    The UK also has a tax break for impatriates: during my second stay, i did not pay any income tax or social insurance, because i was staying for no more than 2 years for the purpose of teaching or research.
    I had to leave within 2 years, though: in Denmark, a similar scheme lets you keep your back taxes AND stay in the country when the 3 years allowed there are over. (Though in Denmark the tax rate does not go all the way to zero.)
    NB: those were the rules in my time, i don’t know how it works now.

  • Snorri Godhi

    PS: i didn’t know that Mr Ed is a TV celebrity, but thanks to John Galt and google, i have learned something new today.

  • PS: i didn’t know that Mr Ed is a TV celebrity, but thanks to John Galt and google, i have learned something new today.

    Are you insinuating that our blog brother “Mr. Ed” is a talking horse? 🙂

  • Mr Ed

    Are you insinuating that our blog brother “Mr. Ed” is a talking horse? 🙂

    Neigh, and thrice neigh!

  • Mary Contrary

    Far be it from me to seem to defend this latest piece of banditry and class-war dog-whistling, but when you say “a foreigner who wants to spend some time in the country” you put your finger on the nub of what does seem rather unfair about non-dom status. Non-dom isn’t just for those who “spend some time in the UK”, or even principally for them: such people are (normally) non-resident.

    When someone very rich, and with suitably impressive accountants moves to the UK, and makes his home and much of his business here, it seems unfair that he should be subject to a different set of taxation rules to the rest of us. Now, you may argue (and I will agree) that he won’t come here if his substantial foreign assets are suddenly brought within the purview of HMRC – but I would argue the proper issue in this is not the “come here” but the “foreign assets”. In short, I’ve no objection to him keeping such assets outside the reach of HMRC, I just want the same privilege for myself. Why should I not be able to keep assets abroad, and thereby keep them beyond the reach of the UK taxman? It’s not UK income, why should the UK tax it? A non-dom is taxed on his UK income like me; why should I not be taxed on my non-UK income like a non-dom?

    The answer, of course, is because then there would be a vast increase in the mobility of capital. Even if taxed in the country where it arose, such a system would instantly create a massive increase in tax competition, and (almost) no country’s government wants that. So from the point of view of the thieving swine, it’s better to allow the rich and well-advised to escape tax than to tax everyone on an equal basis, but at a much lower level.

    The popular idea that non-dom status is an unfair privilege for the rich is not wholly misconceived, it is just that the solution is inverted. For income tax purposes at least, we should all be non-doms.

  • In short, I’ve no objection to him keeping such assets outside the reach of HMRC, I just want the same privilege for myself. Why should I not be able to keep assets abroad, and thereby keep them beyond the reach of the UK taxman? It’s not UK income, why should the UK tax it? A non-dom is taxed on his UK income like me; why should I not be taxed on my non-UK income like a non-dom?

    Some countries do take exactly this approach, for example Malaysia where I live has no taxation of foreign income or capital. Hasn’t had since 2004, net result is that lots of people who have foreign income or capital live here. Like me.

    Whereas if I did the same in the UK I would be a tax evader.

    I’d rather stay where I am wanted, rather than where I am not wanted, a lesson Mr. Miliband might learn all too soon if he gets elected (god I hope not).

  • Runcie Balspune

    The arguments for freedom and capitalism are being lost in the UK, or at the very least, they aren’t being made very effectively.

    I recall a Ms Klass making this point, for someone educated about economics Miliband either seems to know very little of it’s principles or is just another rabid Marxist economist. I agree this argument still needs to be made, perhaps suggest to Miliband he should introduce a “multi-kitchen tax” which costs £1m per additional kitchen in the house, with a 20% extra charge if you only use the smaller one.

  • Lee Moore

    The problem with Mary Contrary’s suggestion is that UK resident and domiciled folk own lots of capital and have lots of non UK assets. If you favour foreign investment over domestic, you will get more of the former and less of the latter. The Hong Kong solution is best – don’t tax investment income at all. But that’s unlikely to figure in the next Labour government’s plans.

    And by the way, the next government is definitely going to be a Labour one. The SNP know perfectly well that – even if the idea crossed their collective mind, which it wouldn’t – propping up a minority Conservative government would be suicide-a-la-Clegg. There’ll be a healthy left wing majority – even, with vast poetic licence, counting the Tories as right wing. Sell your sterling now – you heard it here first.

  • Guy Herbert

    It’s not about the money. It is the insult their existence presents to the totalitarian mind: “Nothing outside the state”.

  • ed in texas

    Look forward to the coming time when you spend a long layover in an airport, and get charged fractional income tax for the portion of your life you spent there.

  • Look forward to the coming time when you spend a long layover in an airport, and get charged fractional income tax for the portion of your life you spent there.

    They would have to change lots and lots of Double Tax Treaties first. Fortunately I think even the IRS would see the pointlessness of chasing a bunch of non-resident foreigners for miniscule tax debts. Equally, foreign courts would just love to tell the IRS to get fucked with their extra-territoriality.

    I seem to vaguely recall that there is a judicial doctrine making it very difficult to chase tax debts in foreign courts.

  • Paul Marks

    As many have said the policy of the left elite establishment is insane.

    They want as many poverty ridden immigrants as possible – to go on government welfare.

    But they want to drive away rich people – using taxes to do so.

    If rich people from overseas want an English speaking home – Guernsey might suit them.

    And if “Red Ed” tries to intervene in Channel Island affairs, this might finally lead these islands to assert their independence.

    After all Canada, Australia and New Zealand have the Queen as Head of State – without having the British government telling them what to do.

  • If rich people from overseas want an English speaking home – Guernsey might suit them.

    Actually the list of English speaking countries that won’t rape you for tax is quite long and getting longer. My own spiritual home on the Isle of Man is one such place. Nice low taxes for any earned income, no inheritance tax (provided you don’t have HMRC’s domicile claws in your back), even a limit on the maximum amount of tax you can pay in any one year.

    But lets face it, various Caribbean islands offer far better climate and much less intrusive tax regimes.

  • Lee Moore

    Ireland still has the old UK style non dom regime. Bigger than Guernsey and the Isle of Man.

  • Ireland still has the old UK style non dom regime. Bigger than Guernsey and the Isle of Man.

    Which excludes people with a UK domicile as I recall.

    However, I am sure all those Russian oligarchs will feel right at home in rural Cork.

  • Lee Moore

    Which excludes people with a UK domicile as I recall

    No. It used to exclude UK source foreign income from the scope of the remittance basis – ie you got taxed on UK source income whether you remitted it to Ireland or not. (The UK non dom remittance regime did the same for Irish source income.) So Ireland wasn’t that good for UK domiciled people, because a lot of their income would be UK sourced.

    However, it turns out that it is absolutely untrue that the EU has done 12,434,890 foolish and wicked things and 0 good things. The EU told both the UK and Ireland that discriminating against Irish and UK income, respectively, was not allowed under EU rules. So Ireland eliminated the exception for UK source income, and UK income is now on the remittance basis for non Irish doms resident in Ireland.

    So it’s 12,434,890 bad and one good thing.

  • Mr Ed

    No, it did a bad thing with one good consequence.

  • Back OT, things are actually looking up for the US.

  • Not very surprising Alisa, the UK’s Tax collection agency HMRC regularly scores the lowest employee satisfaction score across the entire UK civil service.

    HMRC – Civil Service People Survey 2014

    Must be something to do with collecting taxes that makes people unhappy. Certainly the Sheriff of Nottingham never seemed a happy chap either.