Why is there such a fuss over non doms?
With the date of the Budget announced for next week, and informed speculation of 6 May as the date of the general election, UK politics is currently running on overtime.
Earlier this month, the spectre of the non-dom reared its head again with interrogation of Tory Lord Ashcroft over his tax status in the UK, although as he as quick to point out, Labour has its own non-domiciled skeletons in the shape of Lord Paul and Sir Ronald Cohen.
So what is UK domicile, how have these wealthy individuals managed to lose this domicile and what does it mean in bottom line tax revenues?
Domicile
Domicile is a common law concept that is (helpfully) not actually defined anywhere in the UK tax legislation. Its overriding meaning is that of one's 'spiritual home', the place where you belong and wish to see out your days on this Earth, entirely distinct from the US definition of domicile, which is more akin to the UK idea of ordinary residence. Under UK law you may only have one domicile; in the US you could be 'domiciled' in more than one place.
The basic ways in which UK domicile is determined are as follows:
- Domicile of origin -- you assume the domicile of your father at the time of your birth. Both Lord Paul and Sir Ronald Cohen were born outside the UK to non-UK domiciled fathers, so they have never held a UK domicile.
- Domicile of dependency -- if your father changes his domicile before you reach 16 (or if you married before 1974 and your husband changes his domicile), your domicile will change too.
- Domicile of choice -- if you can show you have adopted another country as your spiritual home, this becomes your domicile of choice. Note that it is harder to show you have established a domicile of choice outside the UK than that you have established one in the UK. Funny that.
Lord Ashcroft
Robert Ashcroft was actually born in Chichester to a civil servant father. His father was posted in various countries as part of his job so it is unlikely that Lord Ashcroft's non-UK domicile status arose due to his father's status either at birth or during his minority. Ashcroft was educated in the UK and started his successful business career here.
However, he had spent time in Belize as a child and in 1982, following its independence from Britain, he became heavily involved with the country and had a number of business interests there. He still owns property in Belize.
It is therefore conceivable that Lord Ashcroft made Belize his domicile of choice sometime prior to 2000 (when he was made a peer); his website declares "if home is where the heart is, then Belize is my home", which would fit with this supposition.
When he was made a peer, Lord Ashcroft states that he was required to become a 'permanent resident' of the UK, later clarified to mean 'long-term resident'. However, as explained above, long-term residence does not alter UK domicile status per se, although it may confer 'deemed domicile' for inheritance tax purposes after 17 years. Sinple eh?
UK residence does, however, normally mean that all worldwide income is liable to UK tax. Lord Ashcroft only confirms he has "been declaring all [his] UK income to HM Revenue" throughout the last ten years.
Perhaps he means that any income held within offshore trusts or companies can legitimately escape UK tax, and moreover, as a non-UK domicile he can benefit from the remittance basis and simply leave sums outside the UK to escape tax.
The future?
In Lord Ashcroft's recent statement, he says "David Cameron has said that anyone sitting in the legislature -- Lords or Commons -- must be treated as resident and domiciled in the UK for tax purposes. I agree with this change and expect to be sitting in the House of Lords for many years to come." Lord Paul has also committed to become UK domiciled from 2010/11 onwards.
If Lord Ashcroft does regain his UK domicile, he will no longer be entitled to use the remittance basis, meaning he would become liable to UK tax on his worldwide income as it arises, assuming it actually gets paid out of offshore companies or trusts of course.
However, likely to be of more pressing concern, given his estimated wealth of £1.1 billion is the fact that, as a UK domiciled individual, he will be liable for UK inheritance tax on his death on his worldwide assets. And 40% of £1.1 billion is quite a lot.
But do we really think Lord Ashcroft is going to voluntarily commit to a massive tax bill? He is a savvy businessman after all. By far the simplest way for him to legitimately avoid this potential tax bill is to establish offshore trusts to own his assets while non-UK domiciled.
A non-UK trust set up by a non-UK domiciled person is 'excluded property' for UK IHT purposes, and therefore not liable to UK inheritance tax on death.
So perhaps the cost to Lord Ashcroft of retaining his seat is not so punitive after all…
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