Foreign tax loop hole may be about to close
An archaic rule in the UK tax system means non-domiciled individuals ( “non-doms”) can be born and raised in the UK and pay less tax than their UK citizen counterparts.
A person inherits their domicile at birth. Non-dom status will be triggered where a person’s father or grandfather was born in another country. Archaically non-dom status is not normally triggered if a person’s mother or grandmother was born abroad.
Alternatively a person can acquire a new domicile by proving to the UK government that they intend to live abroad permanently or indefinitely. A number of factors support their intention including owning a burial plot in the other country. Ironically none of the ways a taxpayer might demonstrate an intention to live abroad involve spending any significant time in the other country.
For tax purposes non-doms are under no legal obligation to declare income from foreign investments or bank accounts. Foreign income and gains are only subject to UK tax when brought back to the UK. In contrast a person born to a UK domiciled father and grandfather will be taxed on their foreign sourced income.
The rules encourage non-doms to shift their companies or trusts overseas to keep income and gains out of the UK tax authority’s reach.
Fairness is an important part in administering a tax system. Non-dom rules encourage abuse of the UK’s tax system. At last count 113,000 people had claimed non-dom tax status. The financial impact of wealthy individuals obtaining non-dom status is unknown.
Without non-dom status UK residents are taxed on their worldwide income. This is consistent with New Zealand’s approach to taxation which is based on both residence and source of income.
New Zealand has no equivalent non-dom rule. Instead, an individual becomes a resident for tax purposes when one of two tests is meet. The first test requires personal presence in New Zealand for 183 days or more in a twelve month period. The second is more subjective, relying on the permanence of the person’s place of abode in New Zealand.
Tax exemptions apply to foreign sourced income for first-time New Zealand residents in their first four years.
New Zealand’s approach is more commonplace worldwide. The UK approach may be close to its use-by date, with some politicians calling for the nom-dom rule to be axed.
