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Tax Simon Hildrey explains why it is not only the wealthy who can benefit from non-domiciled status in the UK.

The top of the Sunday Times Rich List is dominated by non-domiciled individuals. Only one of the UK’s five wealthiest people was born in this country, which was the Duke at Westminster.

The wealthiest individual is the Indian-born steel magnate Lakshmi Mittal with a £19.25bn fortune while Abramovich is reported to be worth £10.8bn.

These individuals do not only enjoy wealth most of the population can only dream about but they can also benefit from tax advantages.

The Government says 112,000 people put non-domicile tax status on their self-assessment form in the year to April 2005. This was a rise of 74 per cent from 2002.

There are likely to be thousands of people who are not aware they can claim non-domiciled status as well. It is not only the wealthy who can claim this status.

This is a controversial issue, however, causing left-wing politicians to call for reform. This is not surprising given that non-domiciled individuals can enjoy significant tax advantages, most of which are not open to domiciled taxpayers. Indeed, the Tax Justice Network says the rules are contrary to the Race Relations Act.

Chancellor Gordon Brown decided against changing the domicile tax rules even though he announced a review in 2002. A background paper was subsequently published with the 2003 Budget, which compared domicile and residence rules in various countries. The Government has said in every subsequent Budget and pre-Budget report that the issue is still under review.

Lawyers do not agree on whether the domicile rules will be reformed. Most think at most there will be tweaks because of the Government’s fear that wealthy non-domiciled individuals will leave the UK for Switzerland or Monaco. This could damage the housing market and wider economy.

Domicile is a legal and not a tax concept. It connects individuals to a jurisdiction but is not the same as residency or nationality.

We are all born with a domicile of origin. This is usually taken from our father’s domicile when he was born. For example, if a client’s father was born in Italy but he now lives in the UK, he is likely to have an Italian domicile. If illegitimate, a child takes his or her domicile for his or her mother.

Clients can tell HM Revenue and Customs that they are non-domiciled through form Dom 1, form P86 or on the non-residence pages of self-assessment returns.

Unfortunately, HMRC does not usually confirm a client’s non-domiciled status. The only occasion when HMRC will typically do so is in calculating a client’s tax liability.

This means clients may not be certain they qualify for non-domicile status. Take, for instance, Fernando Gonzalez. His father was born in Spain and has maintained his domicile there. Gonzalez, however, was born in the UK and still lives here.

Gonzalez’s domicile should also be Spain. But he has a better case if he has strong ties to Spain. This may include owning a house in Spain and making regular visits to the country to visit relatives.

There are a number of potential benefits of clients being non-domiciled. They do not pay tax on income earned abroad or gains from their overseas assets. If clients held investments offshore before moving to the UK and they remain offshore, there will be no tax on dividends or capital gains.

If clients earn money in the UK, they can pay tax on this before transferring it to a bank account in the Channel Islands. Any interest earned will then be free of income tax in the UK. Tax will be due, however, if the income or capital gains are brought into the UK in either of these two examples.

Inheritance tax is also not payable on assets held outside the UK if they are owned by non-domiciliaries. But if clients have been tax resident in the UK for any part of 17 of the past 20 tax years, they are deemed domiciled for IHT purposes. This means when they die, their worldwide assets will be subject to IHT in the UK. They do not become deemed domiciled for income or capital gains tax purposes, however.

Before the 2006 Budget, non-domiciled clients could establish offshore life interest trusts to mitigate IHT as deemed domiciled individuals. Non-domiciliaries would not face IHT on the offshore trust’s creation and not pay CGT on transferring money to the UK from the trust.

But now if they are deemed domiciled, they face a 20 per cent upfront IHT charge on transferring assets to such an offshore life interest trust. Distributions from such trusts that have been established since April 2006 will face IHT charges.

By becoming non-resident in the UK for four tax years and then setting up the offshore trust with overseas assets before returning to the UK, however, it is possible to avoid being subject to these tax charges.

Non-domiciliaries also benefit from the fact they do not have to disclose their overseas assets to HMRC.

Anyone over the age of 16 can acquire a domicile of choice, which means they lose their domicile of origin. If clients want to change their domicile to another country, they have to demonstrate they will live in their new domicile permanently.

Charles Gothard, partner at Speechly Bircham, says there are a number of steps clients should take when moving overseas to gain a domicile of choice.

He says they should cut as many links with the UK as possible. This should include ensuring they do not continue to own property or keep personal possessions in the UK. Furthermore, husbands and wives should not carry on living here. Visits to the UK should also be limited.

Gothard says it is advisable for clients to spend as much time as possible in their new country of domicile and establish strong links there. This includes buying property. He says it is recommended that clients include a statement of domicile in their will.

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