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Q&A: Taxing non-doms

12 February 08 00:02 GMT

The government is planning to impose more taxes on rich foreigners who live in the UK but claim they are 'non-domiciled'.

But will the plans discourage investment and leave London lagging behind other capitals?

Who are "non-doms" and what are the current tax rules?

At the moment people with links abroad, but living in the UK can declare another country as their real home, or "domicile", regardless of where they actually reside.

As a result they pay no UK tax on their earnings or capital gains outside the UK.

This has encouraged many rich foreign businesspeople to live in the UK.

Greek shipping tycoons, Saudi princes and American bankers have all taken advantage of the laws.

Few other countries have such a loophole.

Most, like the United States, insist that if you live in the country you have to pay taxes on your worldwide earnings.

How many "non-doms" are there?

The Treasury says that 115,000 individuals claimed non-domiciled status in the tax year 2004-5, the last year when full figures are available.

Of these, only 65,000 reported any UK taxable income. On those who did, the average income was £140,000.

Just 13,000 declared taxable foreign source income, averaging £60,000 each.

But the average income is skewed by a small number of very rich non-doms.

The Treasury estimates that 84,000 of the non-doms earned less than £100,000.

Two-thirds have been in the UK for three years or less, with just 10,000 resident for more than a decade.

They overwhelmingly work in financial and business services, and are likely to based in or near London.

What changes are being proposed?

The government plans to levy a fixed tax of £30,000 on all those who are claiming non-dom status and have been in the UK for at least seven of the last 10 years.

Those who do not wish to pay the levy will have to pay UK tax on all their earnings, including those from abroad.

People with overseas income of less than £1000 will be exempt from the levy.

The government is also planning to tighten up other aspects of foreign taxation, including the residence rules, the treatment of capital gains, and the holding of offshore bank accounts.

The government is consulting on changes to the non-domicile rules until 28 February, and the changes are likely to be introduced in the Budget on 12 March.

How much money will this raise?

The Treasury expects to raise a limited amount from the changes in non-dom status: £350m in 2009-10 and £200m in 2010-11.

This is because it only expects 4,000 people to actually pay the new £30,000 levy.

Only about 23,000 non-doms will be eligible to pay the levy, having lived in the UK for over seven years with overseas income of more than £1,000.

The Treasury expects the vast majority who earn under £80,000 per year to opt to declare all their income instead, as it would not be worth their while to pay the levy.

It predicts that just 4,000 people will leave the country and become non-residents to avoid the tax.

However, the government believes that its anti-avoidance measures and changes to tax rules will yield additional sums, bringing the total tax gain to £500m in 2010-11, and £800m in 2009-10.

Are these figures disputed?

Yes, and even the government admits that the "behavioural consequences" of this sort of tax change are difficult to predict.

More people could choose to leave the country, reducing the tax yield.

And some people who give up non-dom status may choose not to fully disclose their off-shore income, which is difficult to track.

A recent poll of advisers to wealthy clients found that half of their clients were considering leaving the UK in response to the tax crackdown.

This group, the Society of Trust and Estate Practitioners, estimates that non-doms currently pay £7.6bn in tax, which is double the goverment's estimate, and claims the changes will cost the chancellor more than £2bn in lost tax.

What are the concerns of businesses?

Many business leaders are concerned that the change in the tax rules on non-domiciles will discourage investment in the UK.

Lord Jones, a government minister who was formerly head of the business organisation the CBI, says the proposals will make it harder to attract top investors and businesspeople to London.

He observes that businessmen he meets abroad regularly ask him whether the changes mean that the UK no longer wants them to settle here.

The current head of the CBI, Richard Lambert, is also uneasy about the plans.

The US Embassy in London has expressed concern that the changes would conflict with the double taxation treaty between the US and the UK.

The largest group of non-doms is believed to be Americans.

Where do other political parties stand on the issue?

The Conservatives proposed a similar flat-rate tax of £25,000 on all non-doms at their party conference in October 2007.

The government attacked the claim by Shadow Chancellor George Osborne that the move could raise £3.5bn and pay for an increased inheritance threshold to £1m and an exemption from stamp duty for those who buy homes valued at less than £250,000.

The Liberal Democrats also supported the changes but say they do not go far enough.

However, some Conservative backbenchers oppose the change.

Michael Fallon, a former Tory minister and member of the Treasury Select Committee argues that "chasing non-doms out of London is a huge mistake".

But the TUC General Secretary Brendan Barber says: "These extremely modest proposals to make non-doms pay a flat charge for their tax-avoidance will have little impact on the super-rich."

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