UK Special Expatriate Fiscal Regime:

The UK is no tax haven, but it does have relatively low tax rates compared with some other European countries, and it offers exemption from tax for income from foreign investments for people who are resident but not domiciled in the UK. For expatriate executives with assets to invest, a UK posting or residential base therefore offers very good tax planning opportunities.

The concept of domicile, which is unique to the English-speaking common law jurisdictions, attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few 'visiting' residents will therefore have a UK domicile.

Foreign investment income is exempt from tax for such individuals as long as the income is not remitted to the UK. Therefore they can safely make offshore investments knowing that the income will be reinvested without deduction - the ideal way of turning income into capital without taxation. Note however that capital gains crystallised abroad during a period of residence are deemed to be remitted to the UK, and are then taxed. Some types of mutual or hedge fund impose capital gains unilaterally on members.

American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, won't be able to take advantage of this UK possibility, but for all other nationals, it is available. This rule has led to many foreign celebrities making the UK their home for tax purposes. For the last six years, the Treasury has been making threatening noises about the tax privileges of the 'non-doms'. In the 2003 budget a more formal period of consultation was launched over proposed changes.

The most likely reform, according to experts, would be to impose a limit on the number of years that an individual could remain resident in the United Kingdom but not domiciled there for tax purposes. After the expiry of that period, they would be obliged to pay tax in the UK on their overseas income.

Perhaps surprisingly, there has been some support for Gordon Brown's plans from some in the accounting and tax consulting professions. Many organisations are supporting the prospect of reform in this area of tax law, in the hope that new legislation will make the domicile rules simpler. Also, by taking a proactive approach to the reforms, they are hoping to stave off more radical proposals that Gordon Brown may be considering.

Ernst & Young, for example, has proposed that foreigners claiming non-domicile status should be limited to a ten year period of tax exemption, whilst the Chartered Institute of Taxation supports a 17 year period of tax free worldwide income. Meanwhile, the Chartered Institute of Taxation supports simplification of the residency rules, although it is more sceptical over changes to domicile regulations.

Other groups, such as the Society of Trust and Estate Practitioners and the Association of Chartered Accountants have expressed support for shifting the burden of proof from the Inland Revenue to individuals who would need to show that they eventually intend to leave the UK.

It has been estimated by the Treasury that the government stands to gain between GBP1 billion and GBP1.5 billion from a tightening of the domicile rules. However, some experts contend that the government could actually lose revenue if changes prompt an exodus of wealthy foreigners from the UK. In September 2003 the Paymaster-General, Dawn Primarolo, a known tax 'hawk', said she was increasingly hard pressed to justify the current state of affairs to her constituents. Primarolo told the FT: "There seems to be quite a lot of agreement it is not fair...People pay tax...and they want to ensure they are paying a fair amount compared to anybody else. What I am hoping this time is we will actually get to the bottom of it," said Primarolo.

Michael Caden, Tax Partner at the London office of Hacker Young however says that the government simply "wants to have its cake and eat it." Responding to Treasury and Inland Revenue proposals on the issue, Mr Caden has formulated a five pronged plan of action for non-domiciled residents seeking to escape the clutches of the UK tax man: invest for growth rather than income; look for assets that attract taper relief on sales; transfer foreign income and gains abroad as gifts to family members who can import them into the UK tax free; establish a foreign trust to shelter non-UK assets from inheritance tax; and re-invest overseas assets to establish a new/higher base cost.

In January, 2004, the government dropped a further strong hint that the current non-dom rules will be scrapped with the news that the Inland Revenue is building a new database of expatriate workers living in the country. The Revenue is said to have set up five regional offices to collect personal details of non-domiciled workers, including names and national insurance numbers. It has also begun to send out letters to around 6,500 employees asking for information on “inward expatriate employees who are non-domiciled”.

The tax authorities have no accurate way of assessing how many expatriate workers are resident in the United Kingdom under current rules. A Treasury paper published in the April 2003 budget revealed that the Inland Revenue has 16,000 individuals on its database who declared a total income of GBP800 million which stayed out of the Revenue's clutches by being remitted overseas. However, the accounting profession believes the figure is in reality much higher.

Then in May, perhaps the most famous, now ex-non dom was in the news when permission for a full-scale investigation into the tax affairs of Harrods owner, Mohamed al Fayed was granted at the Court of Session. Lord Reed rejected claims that a tax investigation initiated following the ending of the 'forward contracts' tax break for super-wealthy foreign-domiciled UK residents, constituted an abuse of power on the part of the Inland Revenue. Explaining the reasoning behind his decision, the judge observed that: "Mr al Fayed works as a director of major companies, but does not appear to be paid a salary. He lives in expensive accommodation, but he does not appear to own or rent it."

"The natural inference from the evidence is that a great deal of effort and ingenuity has gone into creating networks of offshore companies, trusts and other entities in order to minimise liability to tax." He concluded: "In the face of such opaque and sophisticated arrangements, it is important the Revenue should be able to ensure UK tax liabilities are accurately assessed."

However, the 'pre-budget' statement in late 2004 contained no proposals for any change to the non-dom regime, and it may be that the Treasury has been unable to find a satisfactory way of 'improving' it which doesn't also disadvantage the economy.

When the Budget arrived in March, 2005, this view was confirmed as for yet a further year the Chancellor put off any change to the highly favourable tax regime they enjoy.

The Treasury said: "The Government is continuing to review the residence and domicile rules as they affect the taxation of individuals and will proceed on the basis of evidence and in keeping with its principles. It would welcome further contributions to the debate, which will then be taken forward by the publication of a consultation paper setting out possible approaches to reform.

In 2006 the Treasury continued its policy of masterly inactivity over the taxation of non-doms.

Version date: 07.05.06