non-dom nerdiness part 2 – why we need to be nice to immigrants

One response to the non-dom kerfuffle is to say: let’s just burn it all down, and replace it with nothing. Tax everyone the same. This is a powerful argument, but the messiness of international tax makes it hard for me to resist the conclusion we should have some form of special, nicer, UK tax regime for recently arrived immigrants.

Here’s an example.

• Take Dania, the recent arrival from Germany* in our last example, but let’s make some changes.
• First, say we’ve abolished the non-dom regime, and so she’s taxed like every other UK resident.
• Second, instead of having €50,000 of savings in a Luxembourg investment fund, let’s say instead her savings are instead in an extremely sensible and boring German investment fund. Again €50,000, of which €10,000 is gain.
• And Dania also has a house in Lederhose she bought for €500,000 in 2014 – now worth €490,000,
• After moving to the UK, Dania sells her German house and her investments to fund the purchase of a flat in London.

What happens next?

Dania probably expects the sale of her investment fund to be taxed as a capital gain, and so entirely sheltered by the annual allowance – so no tax to pay. But the UK has a complex set of anti-avoidance rules for foreign funds which only permit capital gains treatment for “approved offshore reporting funds“. Most domestic German funds don’t have this status.  That means that Dania’s sale is subject to income tax and she has €4,000 of tax to pay.

Dania probably expects a capital loss on the sale of her Lederhose house. Sadly UK capital gains tax works in Sterling. The Sterling value of the house when she bought it was about £400k; the current value is £420k – so she has a CGT gain, and tax to pay, even though in reality she has a loss.

Of course if Dania has no German/foreign property at all then she’s not going to run into any of these problems; but the more she has, and the more complex her affairs, the messier things will get… and the more likely the potentially horrid UK tax treatment will put her off moving to the UK.

So there’s a good argument – from both a fairness perspective and a utilitarian one that we should have a some kind of gentler, nicer, tax regime for newly arrived immigrants. One that avoids catapulting them straight into a complicated and potentially unfair tax result, and which gives them time to think things through (and potentially move their assets into types that have a more favourable UK tax treatment). The non-dom regime is absolutely not that – it does a terrible job at this for normal people, as we saw in my first example. On the other hand, it does an altogether spectacular job for the very wealthy – as we’ll see in my next example.

Here’s a thought: how about replacing the non-dom rules with something that helps those we want to help, without giving a massive handout to oligarchs?

* If I wanted to bang the point home even more, I’d have made Dania an American citizen, subject to US taxation on her worldwide assets even when UK tax resident. But (1) it’s just a horrid, horrid mess, and I don’t have the heart to go into it, and (2) it’s the fault of America for having such a uniquely unjust system..,. not reasonable to expect the UK to twist our tax system out of shape to accommodate it.