Set out below is the text of questions posed by a journalist and answers given by me in respect of the issue of taxation and non-domiciles:

1)     How does one qualify for non-dom status?


Domicile is a legal rather than a tax concept, is rather akin to nationality than residence, and works as follows:


A child is born with the existing domicile of its father (or its mother is father is unknown) – this is known as a domicile of dependency. Until the child reaches age 18 (or marries below that age) its domicile follows the relevant parent’s domicile. At the age of 18 a person is capable of establishing their own domicile – their birth domicile is now known as a domicile of origin, and any subsequently acquired domicile of dependency becomes a domicile of choice.


A domicile of origin is hard to change – it requires both a cutting of ties with that domicile and an establishing of ties with a specific new domicile of choice. It is easier to change a domicile of choice by cutting ties with that domicile and acquiring ties with a new domicile of choice. If a domicile of choice lapses without a new domicile of choice being acquired, the person reverts to their domicile of origin.


When I refer to ties above I mean a variety of connections to a particular country, such as social, financial and economic ties. It can also be important in this respect where a person has made their will and where they have chosen to be buried or cremated.


It is implicit in non-domiciled status that a taxpayer is resident in theUKfor tax purposes; if they were not they would be taxable here only onUKsource income.



2)     Will people go to extraordinary lengths to remain a non-dom? Egs?


Yes. I will give a classic example of a client of mine. His parents were Jewish, and fled Nazi persecution in their Polish homeland, leaving behind residential and business property. He was born in theUKjust after World War 2, and has lived here all his life. In the 1980s he acquired a holiday home inIsrael, where he spends around 6 weeks a year.


In the early 1990s, after the fall of the Berlin Wall, he established his claims to his family’s property interests inPoland(his father having died), which were sold in the late 1990s, cutting all family ties withPoland.


I was able to establish Polish domicile for my client on the following basis:


1. His father’s domicile of origin was inPoland, and it was fairly clear that his parents would have returned toPolandhad World War 2 and then the communist occupation permitted them to do so.


2. His own domicile of origin was thus also inPoland.


3. The family retained substantial property interests inPolandthroughout the communist period, although they were unable to legally establish them at that time.


4. Those property interests passed to my client under his father’s will in the 1980s, and were successfully asserted by him in the 1990s.


5.  By the time my client sold his Polish property interests and thus cut his ties withPoland, it was unclear whether his domicile of choice wasEngland(one is domiciled inEnglandorScotland, not theUK) orIsrael, as he had property and spent time in both countries. Thus his Polish domicile of origin persisted.


It is not uncommon for people to be able to establish domicile in countries with which they have had little or no contact for many years.


3)     How complex are the rules governing non-dom status? Changes required? If so, what?


I have given an idea of the complexity of the rules above. They are difficult to change because they are matters of general law rather than simply tax law. Thus when the Government wished to increase the burden of tax on non-domiciles, rather than seeking to change the law of domicile they introduced a flat rate tax charge on non-domiciles who benefit in tax terms from their non-domiciled status (see below for further details)


4)     What are the benefits/ drawbacks of being a non-dom?


The main benefit is that a non-domiciled taxpayer is entitled, if it is to his or her advantage, to use what is called the remittance basis of taxation in theUK. This means that a non-domicile is only taxed in theUKon income and gains arising outside this country if he or she brings them to theUK.


In recent years an annual charge has been introduced for non-domiciles wishing to use the remittance basis, unless they have been resident here for less than 7 of the last 9 tax years, or the amount of income concerned is less than £2,000 in a particular year. The charge is £30,000 for those who have been resident here for at least 7 of the last 9 tax years, and £50,000 for those who have been resident here for at least 12 of the last 14 tax years.


If they do not wish to pay the charge they are taxed on the arising basis; that is to say they are taxed in theUKon worldwide income. Thus a calculation needs to be made each year to decide if it is worthwhile for a taxpayer to pay the remittance basis charge.


Of course the issue with a flat rate charge is that those with modest non-UK income will never choose to pay it, but for those with very large non-UK income it is a drop in the ocean. Many of us thus consider the remittance basis charge to be unfair and inequitable as between taxpayers.


Another key advantage of being a non-domicile relates to inheritance tax. Once a taxpayer has been resident here for 17 of the last 20 tax years, he or she is deemed domiciled here for inheritance tax purposes, but prior to that it is possible for them o place all of their non-UK assets into a non-UK  (offshore) trust, from which they can benefit, and thus keep all of those assets outside the UK inheritance tax net, even once they are deemed domiciled here, which would usually mean they were subject to inheritance tax on worldwide assets.


The main drawback is complexity of financial affairs, as it is necessary to ensure that income and gains are, so far as possible, not brought to theUK. Thus it is common practice to have separate income, capital and capital gains bank accounts, and to remit money only from the capital account. This can be expensive in terms of bank charges, as can operating an offshore trust (which is in fact extremely expensive).


5)     What recent events have had a big impact on non-doms?


Apart from the increase in the annual remittance basis charge from £30,000 to £50,000 mentioned above, the other significant change is legislation allowing non-domiciles to bring income and gains into the country without triggering a remittance basis charge in order to provide equity or loan finance to a UK-based trading company, including a company which they control.


The idea is to stimulate the UK economy with an influx of funds from abroad, and this appears to be a positive change, probably designed to achieve the same objective as the limited remittance basis charge for the seriously wealthy, but much better targeted in that respect.


6)     ICAS has set up a taskforce to produce a set of principles for accountants on tax avoidance following media storm over tax avoiders – will this also cover non-doms?


That is a good question, to which the answer is complex, and is probably yes and no! To explain what I mean, I need to outline the distinctions between various types of tax mitigation and tax avoidance.


It seems to me that there are probably 4 types of what might be loosely termed tax avoidance or tax mitigation:


  1. Behaviour that is encouraged by tax legislation. This would include investments under Enterprise Investment Schemes and donations to charity (which is why George Osborne’s proposed cap in this respect was so controversial). It is entirely possible to construct an argument that says that the tax legislation lays out a framework for the taxation of non-domiciles, and that if they choose to take advantage of that framework by structuring their financial affairs in a particular manner, that is entirely their decision.


  1. What HMRC’s Consultation Document on a General Anti-Abuse Rule refers to as ‘the centre ground of tax planning’.  What they appear to mean by this is planning that legitimately takes advantages of options granted to taxpayers by the tax legislation, without resorting to artificial transactions or transactions that have no commercial justification other than saving tax. I would put Sir Chris Hoy’s arrangements in this category, to give some context.


  1. The grey area between the centre ground of tax planning and         

          what HMRC refers to as abusive tax planning. This is

          inhabited by schemes such as the Icebreaker scheme in           

which Gary Barlow has invested. This has commercial substance, in that it genuinely supports the dissemination ofUKmusic andUKtechnology into overseas markets, but it is also structured in such a way as to give a very large amount of upfront tax relief to investors.


  1. Schemes that are clearly abusive, in that they are

artificially designed with no commercial merit other than the tax saving they achieve. Jimmy Carr’s K2 scheme would fall into this category, as no-one would make an arms-length decision to give their income to a trust which might lend it back to them if the trustees see fit to do so.


So the answer to the question is that taking advantage of non-domicile status by structuring one’s financial affairs in the commercial manner that best suits the current system would generally be regarded as acceptable, but straying into artificial arrangements to take advantage of the legislation would not be. So I suspect the ICAS task force will not look at non-domiciles per se, but may consider some of the tax arrangements they use where these appear potentially abusive.


7)     Recent budgets worked for or against non-doms? In what way?


I would say recent Budgets have very much worked against non-domiciles, certainly those who have been resident here for at least 7 years. Until 6 April 2008 there was no remittance basis charge, so arguably payingUKtax on non-UK income and gains was voluntary for non-domiciles, and certainly it was relatively straightforward to structure a non-domicile’s tax affairs so as to minimise income tax, capital gains tax and inheritance tax charges on non-UK income and assets.


The remittance basis charge has effectively restricted the significant tax advantages of non-domicile status to those who have not resided in the UK for 7 years and those whose UK tax liability on unremitted income and gains would exceed £30,000 (now £50,000 for those who have lived here for at least 12 years), which means of course the better-off non-domiciles, to some of whom such tax figures are a drop in the ocean.


The above changes have to some extent been mitigated by the introduction of the relief from the remittance basis for money brought into theUKto fund trading companies, which is the one positive change for non-domiciles in recent tax legislation.


8)     Any new legislation had an influence? Will have an influence?


I think I have answered this at 7 above.


9)     Big court cases? Impact?


Not in general an area of law that generates high profile court cases, because the domicile status of an individual is a matter of fact rather than law, and as such to be determined by the first tier Tax Tribunal and not capable of being appealed to a higher court. We have not yet seen any significant cases on the remittance basis charge, and other legislation is too new to have generated cases as yet.


10)  How are non-doms generally perceived by government and public at large? Will the recent adverse publicity against tax avoiders tarnish non-doms too? Likely effect of this?


As a tax expert, I have found the vast majority of media coverage of the tax avoidance issue to be facile, sensationalist and frankly confusing for the general public (probably a feeling shared by any expert whose field suddenly becomes of interest to the mass media!) Certainly I know of significant donors to charity who have either curtailed their giving or been the subject of ill-informed criticism on the basis that they were engaging in tax avoidance.


Thus it appears likely that adverse publicity about tax avoiders will tarnish non-domiciles, because of the favourable tax regime that they (or at least the richer of them) enjoy. And if this results in a change to the current regime, which actually gives (to my mind) unfair tax advantages to mega-rich non-domiciles, then all the better from my perspective. Better by far, it seems to me, to seek to tax the worldwide income of non-domiciles and then give relief for funds used to invest inUKbusiness.


The government perspective on this is quite different, I perceive. The presence of extremely rich foreign citizens in theUKis regarded by government as a positive factor, on the basis that they spend significant sums of money in theUKand thus generate tax revenue in that way, even if HMRC does not get its hands on tax on their worldwide income or assets. And of course some of them do invest inUKbusinesses (either their own or others’) and generate economic benefits in that way also. I assume that is why the tax system is deliberately skewed in favour of the richest non-domiciles, to the extent that those who find it worthwhile to pay the remittance basis charge are almost certainly paying a lower rate ofUKtax on their foreign income than less wealthy non-doms who have to pay tax on their full worldwide income. This is a unique situation in theUKtax system, and frankly not one with which I am at all comfortable.


I think the public perception of non-domiciles is in general negative, unless they happen to have invested heavily in one’s football club! They are associated with tax avoidance and ‘not paying their fair share’ of the tax burden, and also perhaps seen as wishing to remain ‘semi-detached’ from theUKby not adoptingUKcitizenship and thus effectively renouncing their non-UK domicile.


Looking forward, I would like to see tax reliefs for non-doms tied firmly to business investment in theUK, but I believe that the government will wish to continue to attract wealthy non-doms to live here, and will thus stick to the current system, which appears to have cross-party support (it was introduced by the Labour government). I also look forward to an informed debate on the nuances of tax mitigation and tax avoidance activity, but I am not necessarily holding my breath!