Inheritance tax and the non-doms

Money Talk
By Ronnie Ludwig
Saffery Champness accountants

Ronnie Ludwig

Speculation rose at the weekend regarding the Tory party's proposals to change inheritance tax.

The headlines were all about raising the starting threshold to £1m.

But how to pay for this?

The Conservatives raised again the possibility of raking in more tax by applying inheritance tax to the entire world assets of the "non-doms".

These are the foreigners who live and work here, but who have their own separate tax-status as they are not officially domiciled here.

There appears to be some confusion between David Cameron and his colleagues as to how much of a priority this matter will be, should the Conservatives form the next government.

But what is even less clear is if such a tax strategy would be successful.

Annual levy

The taxation of non-domiciled individuals has been a political hot potato for many years, with previous administrations shying away from the idea of taxing non-domiciled individuals on their offshore income and gains.

A substantial number of non-doms have already left the UK since the £30,000 flat charge was introduced

Up until a couple of years ago they were taxed in the normal way on UK income and gains from the UK.

However they avoided UK taxation on foreign income and gains unless they were imported here, the so-called "remittance basis" of their tax arrangements.

This all changed recently when the current government decided to impose a £30,000 annual tax levy on those non-domiciled individuals who wished to continue to be taxed this way.

Those who did not pay the £30,000 are now assessed to tax on their foreign income and gains as well.

For inheritance tax purposes however, when non-doms die only their UK assets are taxed.

Foreign assets escape the charge altogether unless the owner had been tax resident in the UK for a minimum of 17 out of the previous 20 years, in which case they became "deemed domiciled", which brought them into the full scope of the charge.

Flee the country?

The risk for any government wishing to bring non-doms fully into the UK inheritance tax net is that these individuals may simply decide that they no longer trust the system and vote with their feet.

A substantial number of non-doms have already left the UK since the £30,000 flat charge was introduced.

The suggested Tory proposals may increase that exodus substantially, which will undermine any hope of raising extra tax from them.

That is why a further tightening of the non-domicile tax rules at this stage represents something of a gamble for any government.

The government of the day may well be able to calculate the potential inheritance tax revenues which may be generated by taxing non-doms.

But it cannot calculate how many non-doms will be prepared to stay in the country and, effectively, volunteer themselves for the tax.

Nasty surprise

There is a very powerful sting in the tail for the non-doms which already lurks in the current inheritance tax laws.

Many may decide to start the three-year clock ticking early by leaving now

This says that anyone who has been domiciled, or deemed domiciled, and then leaves the UK is still liable for UK inheritance tax for another three years - and on all their total world assets.

The idea is to stop people who are dying avoiding inheritance tax by leaving the country in the last few weeks or months of their lives.

If any government extends this rule to the non-doms, many more will leave sooner rather than later, for fear of eventually dying within this three-year tax net, thus leaving a truly enormous inheritance tax bill for their inheritors.

There may be practical difficulties in keeping tabs on every non-dom who leaves the UK in future.

But there seems little doubt that the already fragile relationship with them following the introduction of the £30,000 charge will become a lot more fragile.

Indeed, given the probable result of the next general election, many may decide to start the three-year clock ticking early by leaving now.

Benefits of non-doms

It is worth bearing in mind that non-dom individuals frequently invest in UK businesses and bring their entrepreneurial skills to bear.

This creates employment, which in turn contributes tax revenues to the exchequer, as well as keeping down the numbers of individuals claiming unemployment benefit.

There is another part of the story too.

Non-doms tend to be very generous donors to a wide range of charitable foundations in the UK.

These cover a wide spectrum from medical research through to the performing arts.

That is one reason why successive governments have been loath to tamper with the non-domicile tax rules.

The non-doms may seem like an easy target.

In fact they may be rather harder to pin down, for tax purposes, than many people imagine.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.