Clare Maurice, Arabella Murphy and Sophie Mazzier of Maurice Turnor Gardner take a look at the policies of the UK government that attempt to balance the interests of the state and those of individual taxpayers.
For better or worse, the concept of “fairness” is here to stay in relation to taxation, whether domestic or international. Politicians of all persuasions like to insist that their respective policies will ensure that everyone pays his or her fair share of tax. But tax is also highly political, and is used to discourage or penalise some activities or sectors of society, and encourage others. Some argue that tax has nothing to do with fairness or morality and that the job of government is simply to set out a clear, unambiguous structure within which taxpayers can operate. History (in the UK at least) demonstrates that the methodology of raising revenue has evolved in such a haphazard way that “fairness” at best means balancing the interests of the state (and society) against those of individual taxpayers. In a recent survey, we invited the views of industry colleagues and the general public on what represents a fair balance of these interests.
Whether it is fair or not, taxation is a relevant factor for those who live increasingly multi-jurisdictional lives, along with climate, lifestyle, business and educational opportunities. For many such individuals, becoming or ceasing to be resident may not involve packing suitcases, but rather a decision to spend more, or fewer, days in one country than another. Yet there are those who obsess about the morality of people who can choose between tax regimes with the same ease that they enjoy international travel; earlier this year the UK media’s attention turned again to the perception that wealthy foreigners may enjoy lavish lifestyles in the UK with little or no contribution to the economy. In reality, countries across the world compete with one another to attract such residents and their investment potential.
The UK’s remittance basis derives from the income tax rules introduced by William Pitt the Younger in 1799, which were intended to be fair to those who left their country of origin to live and work in another part of the British Empire. That world no longer exists, but the rules do have some continuing relevance. Individuals and families are now more likely than ever to reside in more than one country during their lives, and the question of whether (and at what point) a country’s tax rules should have full force over newly arrived or temporary residents is not unique to the UK.
The UK is unusual (but not alone) in retaining the Pitt-derived test of “belonging”: the UK taxes your worldwide income, gains and assets only if you are domiciled here (or deemed to be so), but otherwise it only taxes your UK sources of income and gains and your UK assets, or whatever you bring to the UK from abroad. Other countries, such as Israel, Canada and New Zealand, allow varying periods of grace after arrival when foreign income isn’t taxed at all (even if you bring it into the country). Yet others, like Switzerland, allow foreigners to live there on a fixed-fee basis (based on a notional income calculated by reference to housing costs), instead of reporting their worldwide income. In contrast, others charge low or no income tax at all (to anyone). At the other end of the scale, US citizens are required to pay tax on their worldwide income from the outset, even if they reside in another country in future. Where the UK has been – and will remain until 2017 – uniquely generous is in permitting its tax break to continue for as long as a person feels they “belong” somewhere else.
Against that background, the current UK government has set itself a challenge to overhaul the rules regarding the taxation of those who have both UK and international connections. When the election dust had settled, the chancellor used the Summer Budget to announce three fundamental changes to the taxation regime that applies to UK-resident foreign domiciliaries.
The first will affect those with a foreign domicile of origin (and by way of reminder, a domicile of origin in the UK is acquired at birth and is usually that of the individual’s father at the time of birth). From 2017, the remittance basis will only be available to those individuals in this category who have not been UK-resident for more than 15 out of 20 tax years.
The second affects those with a UK domicile of origin who return to the UK. From 2017, even if such individuals had acquired a domicile of choice elsewhere in the meantime, they will be treated for all tax purposes as if they had never lost their UK domicile of origin – even if they were a child when they left – and none of the advantages for those who structure their affairs to take account of the rules regarding the settlement of excluded property by non-UK domiciliaries will survive their return.
Thirdly, all UK residential property will be subject to UK inheritance tax, irrespective of ownership structure. This means that foreign companies that own UK properties will be treated as transparent for inheritance tax purposes.
But does this take us any further in achieving a fair balance between encouraging people to become resident and at the same time, ensuring that new residents make a reasonable contribution to the economy? There will be those who complain it doesn’t go far enough; but perhaps the reality is that tinkering with the old rules, rather than redesigning them for a world in which “belonging” is less relevant, pleases no-one.
So what could a modern tax system for new residents look like? In our recent survey, two-thirds of respondents agreed that, in principle, it is fair for a country to offer some kind of tax advantage to foreign nationals going to live there, whether to attract inward investment, to enable businesses to be set up in that country, to encourage future talent to study and/or work in that country, or even simply to promote personal spending in that country.
Of the responses to our survey, around 60 per cent indicated that the highly subjective concept of domicile was still perceived to some degree as a fair way for the UK to determine who is taxed; but a similar number felt that a tax break for new residents should not be linked to domicile alone (that is, it should not be available for as long as a person feels the UK is not their permanent home, which has in effect been the test until now). Around 80 per cent thought that a more appropriate starting point for taxation would be residence, but on the question of whether tax breaks should be offered to new residents for five, 10 or 15 years or more, the responses reflected the dilemma of governments, and there was no settled view. The US system of citizenship-based taxation (regardless of residence) was roundly rejected: over three-quarters thought that this is not a fair basis for taxation.
Overall, there was two-thirds support for either a tax-free period for foreign income of around five years, or a fixed-tax agreement for foreign income. In addition, 100 per cent of respondents put the encouragement of inward investment as a justifiable quid pro quo for such a break, with 75–85 per cent approval of other motivating factors such as the promotion of employment, study or spending. This was interesting, because respondents broadly said that the remittance basis – with its dogged insistence that, if you bring funds to the UK, they will be taxed – actively discourages the very thing that states want (or should want) to encourage.
The Chancellor’s summer announcements do represent a significant change, but without a fundamental shift in the link between belonging and taxation. In one sense, they are therefore unimpeachable, as the UK is still granting new residents long-term access to the same favourable tax system. On the other hand, these changes apparently fail to cure either the imbalances which critics of the remittance basis dislike, or the paradox that the remittance basis actively discourages people from bringing money into the UK.
However, although the government’s overall policy is clear and unlikely to change, the consultation paper due in late September may leave open the possibility of adjusting the proposed changes to ensure they work effectively, or at least informing future (further) changes. The UK government has learned from the bitter experience of its predecessors that rushing through new legislation, particularly in the complex sphere of private wealth, is often counter-productive. It has been quietly listening to the views of industry professionals over the summer, and is preparing to take on board technical and practical feedback to reduce the potential for errors.
Meanwhile, official figures suggest that the number of applicants for UK investor visas in 2015/Q2 was down 80 per cent year-on-year, a drop in part attributed to the decision once again to change the future tax treatment of non-doms. A sign, perhaps, that in their efforts to achieve a fair balance, no government should go too far in assuming the willingness of foreigners to pay to live in their country.