United Kingdom to clamp down on tax exiles

Tax exiles who emigrate overseas and wealthy people who live here but avoid British taxes by registering as ‘non-doms’ are likely to be targeted by new rules the Treasury begins consulting on today according to The Telegraph.

Wealthy foreigners who have lived in Britain for 12 or more years are already due to be charged £ 50,000 a year from next April, if they wish to retain ‘non-domiciled’ status. This enables them to avoid paying tax here on their worldwide income and gains – an option few other countries offer foreign residents.

But recent litigation has revealed confusion about when Britons who have moved overseas can legally avoid UK income, capital gains and inheritance taxes. Now leading accountants say the Treasury must modernise fiscal statutes and ensure everyone pays their fair share.

John Whiting, a director of the Chartered Institute of Taxation, said: “The rules on tax residence are jumbled and uncertain and are far from what we need for a modern tax system. The aim must be for a statutory test to give businesses and individuals certainty in this increasingly mobile world.

“A statutory test needs to make sure there is proper recognition of those who go abroad to work, who need to be outside the UK net, and clear rules that tell those who come to the UK when they will be in the UK tax net.”

Richard Mannion, a director at Smith & Williamson, pointed out: “Much of the law regarding an individual’s tax residence status in UK is based on case law that was laid down nearly 100 years ago at a time when Indian civil servants retired to live in hotels in Europe and sea captains embarked on circumnavigations that took a whole year.

“There was no concept than of airline pilots or businessmen with interests in different countries throughout the world who flew in and out of the country on a regular basis. There were few new tax cases on residence until recently, when there have been several which have captured the headlines including Mr Robert Gaines-Cooper, a jet setting businessman, and Mr Lyle Grace, an airline pilot.

“These cases have shown how ill-equipped the old case law is in terms of dealing with the modern world and they have demonstrated the need for a more modern test.”

For example, married couples should be freed from antiquated rules, said George Bull of Baker Tilly: “The Government should abolish the £55,000 IHT inter-spouse exemption limit for mixed domicile couples which is petty, unnecessary and potentially illegal under European Union law.
“It should also remove the rule which treats women married before 1974 as having their husband’s domicile. In 2011, women are not chattels.”

David Kilshaw, chair of private client advisory at KPMG in the UK, added that residency rules differ for different taxes: “For income tax, you can be non-resident in the UK if you are working abroad under a full time contract of employment for a complete tax year. You can also be non- resident if you leave the UK ‘permanently or indefinitely’.

“Capital gains tax is more difficult as this requires at least five complete tax years out of the UK. If an individual returns to the UK within the five tax years following departure some capital gains made in this period become chargeable to tax in the year of return to the UK.

“But domicile – not residence – is the determining factor when considering inheritance tax. Domicile is governed by general law and there are special provisions that deem an individual to be domiciled in the UK for inheritance tax purposes where they have been resident in the UK for at least 17 out of the last 20 tax years.” See the full story in The Telegraph.