'Non-Doms' Wonder if it is Worth Staying in the UK
24th
December 2007
Scores of wealthy
foreigners are meeting advisers to review their assets and weigh
up whether pending tax changes for "non-domiciled" residents
will force them to leave the UK.
Foreigners and their
employers are increasingly worried that the new tax treatment
they face will be so expensive it will not justify staying, say
accountants and solicitors.
There are about
114,000 people claiming non-dom status in the UK, according to
the Treasury, which says one in six of Britain's highest earners
is foreign-born. After April 5, those who have lived in the UK
for more than seven years will pay an additional flat rate
charge of £30,000 a year if they want to avoid paying tax on
their overseas income and capital gains.
Those non-doms who
are most concerned by the pending changes are the "middling"
rich working in the City who have less than £1.5m in assets,
accountants say.
"There's a perception
that these changes only apply to the very rich, but the fact is
they are going to affect working people," says an American who
has worked in the City for 23 years and is now looking to move
his family back to New York.
A number of questions
remain unresolved, accountants and barristers say. Americans,
who already pay tax on worldwide income to the US government,
could face double taxation in some instances unless US and UK
regulators agree to amend their tax treaty and introduce new
credits, for example.
Americans with
holdings in mutual funds and hedge funds who do not pay the
£30,000 fee and accept UK taxation on worldwide income could be
affected severely, says Christopher Groves, a partner at
Withers, the UK law firm.
"US investors will
therefore be prohibited by the US rules from investing in UK
qualifying funds and by the UK rules from investing in the US
qualifying funds," says Mr Groves. "Consequently, investing in
mutual funds will be very unattractive for US citizens resident
in the UK."
Also, there is a
sharp difference in the way UK and US tax authorities treat
hedge funds.
Americans who put
money in US hedge funds structured as a so-called limited
liability company pay tax on the income and gains of the fund
each year. In the UK, however, investors pay tax when they
dispose of their interest in the fund and their accrued income
and gains since purchase are taken into account at that time,
according to Withers.
"This is going to
present big compliance issues," says Mr Groves. "Resident non-doms
will have to restructure their offshore investment portfolios so
that they are UK tax-efficient."
In addition to
meeting accountants and solicitors, an increasing number of
foreigners are reviewing property portfolios, report estate
agents at Douglas and Gordon, and Knight Frank.
Some wealthy non-doms
who control offshore companies, or trusts which own properties
are even looking to make a quick sale on the property to avoid
paying capital gains tax before their tax status changes in
April.
"I have a non-dom
client with a three-bedroom penthouse apartment in Knightsbridge
worth £4.75m who told me I had to sell the property by the end
of March before the rules on his tax treatment change," says
Rupert des Forges, an agent in the Knightsbridge office of
Knight Frank.
If more non-doms sold
properties in London it could affect the slowing housing market,
according to housing economists. About 66 per cent of prime
London properties worth more than £2m are owned by foreigners.
