Plans to tax wealthy foreigners living
and working in the UK have sparked huge controversy. The rich, such
as hedge fund managers and people in City of London finance, can
easily shift their domicile abroad and so deeply damage the UK
economy.

A growing chorus of protest has greeted government proposals to tax
wealthy individuals who have taken up residence in the UK. These
non-domiciled individuals, who spend an estimated £17 billion
($33.7 billion) in the UK annually, could severely harm the economy
if they fled abroad, according to warnings in the wealth management
industry.

Most of the UK’s estimated 111,000 ‘non-doms’ would be hit by new
rules that ban the use of offshore mortgages and trusts to pass off
UK earnings as tax-free income generated overseas, according to tax
and accountancy specialists.

And signs that some rich ‘non-doms’ are already moving their
domicile have emerged. HSBC Private Bank reported that the number
of inquiries from its UK non-domiciled clients about moving to
Switzerland has increased significantly since the Treasury’s
pre-budget report in October, when the proposals were first
unveiled.

Chancellor of the Exchequer Alistair Darling announced that
foreigners living in the UK for more than seven years will pay an
annual fee of £30,000 or be taxed on their worldwide income. The
Treasury later said it may charge £50,000 for those in the UK for
more than a decade. Its consultation document also asks whether
there is “a case for any further changes to the rules on the
treatment of non-domiciles”.

Tax protection

The number of non-domiciled workers in the UK has almost doubled
since 2003 to 110,000. The status offers protection from tax
unavailable in any other Group of Seven nation and has sparked
criticism from members of Parliament in the ruling Labour
Party.

Declan Sheehan, chief executive of UK and Channel Islands at HSBC
Private Bank, said: “The £30,000 charge was a political solution
but people are not particularly worried about that. The concern is
over the proposed taxation on remittances, the number of days they
will be able to spend in the UK and whether this is the beginning
of the end through other proposals.”

Investor unease

A study by The Stonehage Group, a specialist adviser to ultra high
net worth (UHNW) international families, believes that tax
proposals on domicile may discourage investment and spending in the
UK. The small print contained in the proposals and the consultation
has created “considerable unease” among ‘non-doms’, it said.

For example, there is uncertainty over whether even ‘non-doms’ who
have been in the UK for fewer than seven years can still remit
capital from off-shore structures without paying capital gains tax
and whether they will have to pay capital gains on the sale of UK
assets held in offshore trusts when the gains arise. This could
discourage ‘non-doms’ from investing in the UK and bringing in
money to spend.

The Stonehage findings follow a six-month research process
conducted under the supervision of professor Geoffrey Wood,
economics professor of Cass Business School in London. In its key
findings, the research estimated that ‘non-doms’ spent an estimated
£16.6 billion1 in the UK, excluding housing and non-VAT expenditure
– a figure that is nearly equivalent to Luxembourg’s GDP. In
addition, tax collected from ‘non-doms’ in the tax year to
end-April would have been about £7.1 billion, comprising £3.9
billion in UK income tax, £2.9 billion in VAT and £308 million in
stamp duty.

The calculation is that income tax paid by ‘non-doms’ per capita
represents on average eight times as much income tax as the
national average. Some one in six taxpayers earning over £1 million
of taxable income a year were ‘non-doms’. In the tax year ended
April 2007, the number of UK taxpayers earning over £1 million rose
from 6,000 to 7,000.

Andrew Rodger, director of Stonehage, commented: “The changes
proposed (by the government) suggest that there has been a marked
negative shift in attitude by the UK government towards ‘non-doms’,
which is surprising given that a high proportion of them are
skilled workers, particularly in financial services working in the
City of London. The amount that would be raised from a levy is
likely to be disappointing, while the risk of losing entrepreneurs
and skilled workers in the financial and professional services
sectors and in manufacturing is quite high.”

Uncertainty

Rodger said one issue causing concern is whether ‘non-doms’ will be
asked to disclose details of overseas assets and associated income,
in light of recent issues at the HM Revenue & Customs (HMRC)
tax agency regarding the security of personal information. In
addition, a period of consultation is under way at the Treasury
regarding the treatment of ‘non-doms’ who have lived in the UK for
over ten years, causing further uncertainty.

Based on a sample of 34,800 ‘non-dom’ cases handled by HMRC
Expatriate and Complex Personal Returns teams using data from
self-assessment returns completed for the tax year ended April
2002, the Stonehage research calculates that 23 percent of
‘non-doms’ had spent over six years in the UK. This suggests that
one-quarter of ‘non-doms’ may be affected by the proposed annual
fixed levy of £30,000. An estimated 10 percent of ‘non-doms’ have
lived in the UK between six and nine years.

Americans hard-hit

One group of ‘non-doms’ expected to be particularly hard-hit are
wealthy Americans, whose representatives quickly complained to the
government that they will be unfairly singled out under its
proposals. US nationals make up a large proportion of the estimated
110,000 ‘non-doms’ in the UK.

Officials at the US embassy have met the Treasury to outline the
concerns of US ‘non-doms’’ that they will be unfairly charged. The
Americans also argue that they may be forced to complete two
separate tax returns, creating a headache for accountants. Unlike
almost every other country, the US imposes taxes on its citizens
even when they are working abroad. Americans can usually offset UK
taxes against their US bill. However, embassy officials have told
the Treasury that the proposed charge cannot be offset, because it
has no equivalent in the US tax code.

A spokesman for the US embassy said: “The US government is studying
the potential impact on American citizens of the proposed tax
changes in the recently released consultation paper issued by HM
Treasury.”

The Treasury has refused to accept the complaints, saying its
proposals are fair and that any fault lies with the US tax
system.

ALTERNATIVES TO THE UK

If highly mobile ‘non-doms’ do flee the UK, a number of low-tax
domiciles are available, several of which have initiatives intended
to attract the wealthy.

Monaco bids for the wealthy

Monaco, which has launched a campaign to become the domicile of
choice for the ultra-wealthy, claims to have been attracting
inflows into its banking industry at record rates. While the banks
in the principality will not disclose the volume of money they have
attracted recently, some industry analysts put it at as much as €20
billion ($29.5 billion) over the past 18 months. This brings the
overall total in the principality to at least €70 billion in total
managed assets.

Monaco also has a plan, details of which have not been disclosed,
to double the amount in local private banks in the next few years
through modernising its financial services regulation and
infrastructure. For example, it has been trying to underline the
attractions of the country to hedge fund managers in order to
foster a local alternative investments industry.

Under current rules, individuals who are not Monégasque require
formal consent from the French and Monégasque authorities in order
to stay in Monaco for more than three months. A non-French national
will need a resident’s permit which, if granted, is initially valid
for one year at a time for the first three years and renewable at
three-yearly periods thereafter. After nine years, a ten-year
permit can be applied for and afterwards citizenship becomes an
option.

In Monaco there are no income, capital gains, wealth or withholding
taxes payable by individuals resident locally, except for French
nationals who pay French tax. The only direct taxes in Monaco are a
business profit tax, payable by certain companies and other
entities; registration and stamp duty on various transactions,
which can include the sale of personal assets; and mortgage
duty.

Succession duties and gift taxes are payable in Monaco only when
property situated in Monaco is transferred inter vivos or by reason
of a testamentary disposition and then only when transferred to
persons other than the transferor’s spouse or persons in the direct
blood line.

Monaco has its own rules regarding forced heirship but has passed a
law to enable foreigners to dispose of their assets as they would
do in their own country.

Taking the Swiss option

Another major destination for the wealthy is Switzerland. Under
present rules, HNW individuals who have a verifiable net worth of
more than CHF2 million ($1.8 million) and are willing to be
physically present in Switzerland for at least 183 days per year
may agree a fiscal arrangement with cantonal authorities based on
Switzerland’s federal law. The arrangement is known as ‘forfeit’ or
a ‘fiscal deal’.

To be eligible, the individual must be retired and must not have
worked in Switzerland for the past ten years. There will also be a
prohibition on seeking gainful employment in Switzerland while
resident, excluding overseeing investments generally.

If granted a fiscal deal, the individual can pay a fixed amount of
tax every year. The tax is levied on expenditure and standard of
living and bears no relation to their income or wealth. Neither
income nor assets need to be declared.

The taxable amount is calculated on five times the annual rental
value of the property occupied in Switzerland. Many cantons have
unofficial minimums for the taxable income before granting a
residence permanent. Inheritance tax and gift tax are levied by
each canton and these taxes remain payable by persons who have
negotiated the fiscal deal.

Channel isles offer low taxes

In the Channel Islands, both Jersey and Guernsey are attractive to
the non-UK domicile as there is currently no capital gains tax, no
inheritance tax and no VAT. The main tax that residents have to pay
is income tax, which is set at a flat rate of 20 percent.

While there has been a housing shortage for the local resident
population, HNW individuals seeking to relocate to the Channel
Islands will be required to make an application for the allocation
of a residential qualification and this is linked to the level of
agreed taxable income that a successful applicant will make.

Subject to negotiation, the likely minimum tax contribution
expected of an applicant will be in the region of £100,000 per
annum.

Spain wants wealth

Spain has moved to make its rules covering wealthy foreigners more
accommodating. The Executive Immigrants Regime, a tax regulatory
system introduced in 2005, states that any individual will be
deemed to have their residency for tax purposes in Spain when they
stay more than 183 days in Spanish territory within the same
calendar year.

In addition, the Executive Immigrants Regime provides important
concessions to people taking up residence in Spain for the purposes
of engaging in full-time Spanish employment. Certain qualifying
conditions must be met. For example, the person must not have been
resident in Spain during the ten years prior to the transfer of
residence, the transfer of residence must be consequent to taking
up employment in Spain, and the employment contract must be with a
company or entity that is resident in Spain.

The effect of qualifying for the Executive Immigrants Regime is
that for the duration of the relevant employment contract or, if
shorter, for five tax years, the person is taxed as a non-resident
for the purposes of Spanish tax on income and capital gains and
Spanish wealth tax. This means that Spanish taxation is restricted
to Spanish source income and capital gains on Spanish-situated
assets and Spanish wealth tax on Spanish-situated assets.

The regime has no effect on liability for gift and inheritance
taxes. Spanish inheritance taxes and gift taxes are levied on the
heir or the donee. They are payable in respect of gifts or
inheritances of Spanish property or gifts or inheritances of
non-Spanish property received by Spanish residents.

Dubai’s magic carpet

In the Gulf, Dubai has moved to become an effective tax haven.
Apart from the oil industry and the domestic banking sector, Dubai
is a nil tax haven for individuals. There are no income or capital
taxes, no inheritance tax, no sales or goods tax and no withholding
tax.

Taxes are limited to import duties, mostly at rates up to 10
percent; a 5 percent residential tax assessed on rental value; and
a 5 percent tax on hotel services and entertainment.

Dubai does have forced heirship rules and for this reason persons
moving to Dubai often choose to own property through offshore
companies.