{"id":6395,"date":"2022-05-06T13:32:23","date_gmt":"2022-05-06T12:32:23","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=6395"},"modified":"2022-05-08T14:19:17","modified_gmt":"2022-05-08T13:19:17","slug":"non-dom-nerd-1","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2022\/05\/06\/non-dom-nerd-1\/","title":{"rendered":"Non-dom nerdiness part 1: how are normal migrants taxed?"},"content":{"rendered":"

Enough time has passed since the non-dom kerfuffle that I wanted to step back, pause, and explain why I regard the current rules as so flawed, and what could be done to fix them (spoiler: rip them all up and start again – it’s the only way to be sure<\/a>).<\/p><\/blockquote>\n

But before I do that, I wanted to respond to the thousands of people<\/a> clamouring for a nerdy explanation of what the non-dom rules actually are, and what they do.<\/p>\n

This is going to be a fairly long series of posts, and so is a bit of an experiment. The many, many<\/a>, demands on my time mean that I won’t continue this unless it seems to actually help people, so please do give feedback, in the comments below or on social media. Particularly if I’ve got stuff wrong.<\/p>\n

As with many things Tax, I will get completely lost if I launch right into a complex example, so I’ll start with something simple and try to build up. Let’s start with a normal non-dom – the kind of person most people agree we want to attract to the UK.<\/p>\n

Example 1: Dania vs Dan- the basic case<\/strong><\/p>\n

Dania is our non-dom. She was born in Germany, but moved to the UK to get experience in her profession, but sees her long term future back in Germany. So she is UK resident but German domiciled. That wasn’t a choice<\/a> – it’s an automatic consequence, and it doesn’t change her income tax position one bit. Dania then ticks this box on her tax return :<\/p>\n

\"there's<\/p>\n

That absolutely was a choice<\/a>, and changes her tax position significantly.<\/p>\n

Dania has a job in the UK and savings in the UK and is fully taxed on both. Because she’s claiming the remittance basis, Dania gets no personal allowance .<\/p>\n

By comparison, Dan was born in the UK, has always lived in the UK. So he is UK tax resident, and also clearly UK domiciled. He has a job in the UK and savings in the UK. He is fully taxed on both (after using his personal allowance of \u00a312,570).<\/p>\n

Both Dan and Dania\u00a0hold shares in the same Luxembourg investment fund. Dan is fully taxed on that – income tax on dividends, and capital gains tax if he sells (with an allowance of \u00a312,300). But because Dania is a non-dom, the UK doesn’t tax her dividends and gains on the shares, provided she doesn’t bring (“remit”) the funds into the UK. She can pay the funds into her German bank account, use them to pay for holidays etc outside the UK. But bring it in, and it’s a taxable remittance.<\/p>\n

Here’s the important thing: no other country will tax Dania’s dividends and gains on the shares. She’s not resident in Germany, so Germany won’t tax her. Nor is she resident in Luxembourg. Some countries impose withholding tax on dividends, but dividends on Luxembourg investment funds aren’t subject to withholding tax.<\/p>\n

Note lots of people claim that the remittance rule just avoids double taxation. That’s somewhere between wrong and an over-simplification – and in this case, it’s dead wrong. The non-dom rules mean that Dania pays no tax, anywhere, on her Luxembourg investment fund.<\/p>\n

So Dan is better off than Dania on their employment income – to the tune of about \u00a35,000 cash (assuming they’re both 40% taxpayers). Dania is better off on her investment fund dividends and gains, which aren’t taxed at all. But actually the generous dividend allowance<\/a> and CGT personal allowance means Dan won’t be taxed either, unless his portfolio becomes substantial.<\/p>\n

Dania may be starting to think she got this one wrong.<\/p>\n

Example 2: Dan and Dania buy a house – unrealistic example<\/strong><\/p>\n

Dan and Dania coincidentally both decide to buy a house, funding the deposit with their savings from not buying avocado toast<\/a>, and by selling their substantial investment funds.<\/p>\n

Now the unrealistic bit to make things easy: Dania bought her shares in the investment fund right before she became UK tax resident, paying \u20ac50,000. Six months later, after she’s become UK tax resident, the shares are worth \u20ac56,000 – in part because they’ve gone up in value by \u20ac5,000, and in part she received \u20ac1,000 of dividends which she reinvested.<\/p>\n

At that point she sells the shares, and (another unrealistic bit) she has the \u20ac56,000 proceeds wired straight to her account in the UK. This is a taxable remittance, and Dania has to pay income tax on the \u20ac1,000 of dividend income – but because she\u2019s a non-dom she doesn\u2019t get the lower dividend rate or the dividend allowance*, so \u20ac400 of tax. \u00a0Plus\u00a0capital gains tax at 20% on the \u20ac5,000 of gains (with no allowance). So total tax of \u20ac1,400.<\/p>\n

If Dan’s investment fund performed the same, he also has a gain of \u20ac5,000. But Dan will pay no tax at all, because the gain is entirely sheltered by his personal allowance.<\/p>\n

Dania is probably shouting at her tax adviser at this point.<\/p>\n

Example 3: Dan and Dania buy a house – realistic example<\/strong><\/p>\n

Everything is the same as in Example 2, but\u00a0Dania didn’t buy the shares in the investment fund right before she became UK tax resident – she’s had them for years. The value when she became UK tax resident was still \u20ac50,000, and the value when she sold \u20ac56,000.<\/p>\n

Now Dania has to work out all the historic gain on the shares (not just the gain during the period she was in the UK), and the taxable income on the shares (the income earned during the time she was UK tax resident). So a potentially tricky calculation, and – as there is more gain – more tax to pay.<\/p>\n

Let’s make things more realistic still. Say\u00a0Dania didn’t wire the sale proceeds straight to her UK bank, because her German broker couldn’t do that. The proceeds were paid into her German current account, which had \u20ac5,000 in at the time, and then paid straight out to her UK current account.<\/p>\n

Because the funds mixed with other funds in Dania’s German current account, we now enter the twilight world of the mixed fund rules<\/a>. Dania has to look at the \u20ac5k previously in her current account and ask: how much was was derived from income earned whilst she was UK resident?; how much was derived from capital gain whilst she was UK resident?; how much is capital (i.e. neither)? Then a priority rule is applied which basically gives Dania the worst possible tax result she could get from any combination of the funds in the account.<\/p>\n

At this point Dania has probably paid considerably more tax than if she hadn’t claimed the remittance basis, probably lost another \u00a35k in adviser fees, and very possibly lost the will to live.<\/p>\n

This is why, in the real world, Dania really shouldn’t claim the remittance basis. It probably only makes sense for a “normal” person if they’re a good bit wealthier than Dania, so the remittance basis benefit eclipses the CGT allowance (probably meaning assets of well into six figures) and<\/strong> they positively, definitely, won’t remit a significant portion of those assets into the UK and<\/strong> they’re happy lobbing a few \u00a3k at a tax adviser on a regular basis.<\/p>\n

The real world<\/strong><\/p>\n

Back in the real world, most non-doms are like Dania – it makes no sense for them to claim the remittance basis, and therefore they don’t.<\/p>\n

How do we know this? 9.5 million people living in the UK were born abroad<\/a>, so there are probably millions of non-doms. But only about 50,000<\/a> claim the remittance basis.<\/p>\n

And for most of those, the benefit is pretty limited. How do we know that? Because of this chart from the ONS<\/a>:<\/p>\n

\"\"<\/p>\n

After 7 years of being a non-dom, you have to pay \u00a330,000 a year to claim the remittance basis. After 12 years, \u00a360,000. After 15 years, you used to be able to pay \u00a390,000, but now you’re simply deemed UK domiciled.<\/p>\n

Fewer than 2,000 people pay the \u00a330,000. Telling us that there are only a few thousand people for whom the remittance basis is worth more than \u00a330,000.<\/p>\n

My next post<\/a> looks at why we need any kind of non-dom regime. After that, I’ll look more closely at those few thousand people, and how the non-dom rules work for them. If your guess is “very well indeed” then you’re not wrong.<\/p>\n

 <\/p>\n

*many thanks to\u00a0Nimesh Shah<\/a>\u00a0of Blick Rosenberg for correcting the initial version of this blog. I\u2019d assumed the remittance of a dividend is taxed at the dividend rate, and benefits from the dividend allowance. Dead wrong. Unchecked assumptions are dangerous things.<\/p>\n","protected":false},"excerpt":{"rendered":"

Enough time has passed since the non-dom kerfuffle that I wanted to step back, pause, and explain why I regard the current rules as so flawed, and what could be done to fix them (spoiler: rip them all up and start again – it’s the only way to be sure). But before I do that, […]<\/p>\n","protected":false},"author":1,"featured_media":6364,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[88],"tags":[97,86],"jetpack_featured_media_url":"https:\/\/heacham.neidles.com\/wp-content\/uploads\/2022\/05\/177876001.jpg","_links":{"self":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/6395"}],"collection":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/comments?post=6395"}],"version-history":[{"count":9,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/6395\/revisions"}],"predecessor-version":[{"id":7071,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/6395\/revisions\/7071"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/media\/6364"}],"wp:attachment":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/media?parent=6395"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/categories?post=6395"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/tags?post=6395"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}