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19 September 2019updated 06 Sep 2021 2:18pm

The Treasury’s plan to crack down on rich non-doms is not all it seems

Offshore trusts appear to be safeguarded in the Treasury's plan to crack down on rich non-doms living in the UK.

By franchescahashemi

You might think that with imminent cuts to tax credits that George Osborne’s plan to shake up non-dom tax rules will target people channelling their riches into offshore trusts. Instead, Conservative politicians appear to want to safeguard this tax loophole.

The Treasury has reiterated its Summer Budget promise to crack down on non-doms – UK residents whose permanent address is outside of the country for tax reasons. But the latest government consultation paper makes it clear that wealthy families can shield their foreign income from UK tax by setting up an offshore trust ahead of the reforms taking effect in 2017.

Worse still, the Treasury plans seem to “protect” a non-dom’s legal tax-avoiding structure even after they classify as a domiciled UK citizen. It is a truly iniquitous sentiment – and one that has largely escaped scrutiny.

Taxation has to be fair if it is to work. But the non-dom rule fuels perpetuates the fact that money buys opportunity. This is an assault on British society, especially for low-income parents, middle earners and young professionals; the people who pay astronomical rent for grotty flats, who are stuck in a polluted stratosphere watching their wages deplete as quickly as the cost of living rises.

The Treasury’s rationale for imposing the offshore measure is the “very punitive and administratively burdensome” tasks that non-doms will have to otherwise deal with. Boo-hoo. If only Osborne could recognise the “burdensome” impact of the Institute for Fiscal Studies (IFS) findings: that 3m families are set to lose £1,000 a year in tax credit cuts.

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Characteristically, the Conservatives have included a few morsels of hope in their paper: from April 2017, people born in the UK will lose their right to inherit non-dom status (a non-dom facet that has puzzled people for years, but not the Tory’s London mayoral candidate Zac Goldsmith who cleverly relinquished his hereditary right before entering parliament), and the tax privilege’s permanency will be removed.

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However, the fact remains that foreign earnings, houses or cars structured in offshore trusts, but not brought to the UK, can remain free from tax.

Only when foreign wealth is “remitted” to Britain will non-doms have to cough up, and even then the government has a deal in place: the Remittance Base Charge (RBC). For years, RBC has allowed non-doms to pay a flat fee of £30,000 – £90,000 (depending on how long they’ve lived in the UK) in exchange for tax-free access to overseas wealth, meaning it is a loophole effective only for uber-rich plutocrats.

Yet under the new proposals, a non-dom will be “deemed domicile” from their 16th year in the UK. So, in theory, they will be taxed fully on foreign wealth rather than cashing in on RBC. But, looking at the Treasury’s plans, they could create an offshore hide-out for foreign income as soon as possible, and be in with a better chance of avoiding UK tax in future.

The non-dom tax system shows that the government is happy for wealthy people to swap their riches for political privileges, which only amplifies the argument that austerity is a class war.

The government’s cuts to tax credits juxtaposed with this non-dom paper makes a frightening composition. Exact statistics on non-doms’ foreign wealth, and therefore what the UK economy could gain in tax, are near impossible to come by. Abolishing non-dom status, as the New Statesman leader on the subject states, “might not raise huge amounts in revenue but it is a statement about the kind of country Britain wishes to be“.

Second point of relevance: 114,800 people registered as non-doms in 2012/13, although the IFS have said the real number is likely to be higher. Of the registered non-doms, 5,100 paid a collective £226m in remittance charges, while the Telegraph has reported non-doms paid £8.2bn to HMRC over the same period.

The latest figures show that non-doms pay on average £130,000 a year in income tax, which is 25 times more than the average person. But if the average person in the UK pays full tax on their earnings, in whichever country they are made and regardless if it is a smaller amount, so should everyone else. Only when an admission like this features in non-dom proposals will the Conservatives’ “social justice” line make an iota of sense.

Another aspect of this messy situation is exactly as New Statesman contributor Sophie McBain describes: “Once a billionaire buys a Mayfair mansion there’s a very strong tax incentive for him to keep it empty for most of the year: if they spend too much time in the UK , they lose their non-dom tax status and their tax bill shoots up.”

The argument that the existence of wealthy folk beefs up the British economy, while the removal of non-dom status will cause their mass exodus, is an unfounded and over-egged speculation.

London’s financial district did not appear overnight and neither will it disappear with the removal of an indefensible tax loophole.

The non-dom set-up is a perverse rule that entitles super-rich people to reap the benefits of a system that few other world leaders have the audacity to offer.