{"id":9806,"date":"2023-06-27T08:33:04","date_gmt":"2023-06-27T07:33:04","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=9806"},"modified":"2023-09-10T22:50:49","modified_gmt":"2023-09-10T21:50:49","slug":"citizenship","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/06\/27\/citizenship\/","title":{"rendered":"Citizenship-based taxation. Should all UK citizens pay tax in the UK, even if they live abroad?"},"content":{"rendered":"\n

No. It’s a terrible idea. Here’s why.<\/em><\/strong><\/p>\n\n\n

How the UK system currently works<\/h2>\n\n\n

The UK taxes individuals based on their residence. If you live in the UK for 183 days in one tax year (or more than 90 days if you have a home here)1<\/a><\/sup>It’s a bit more complicated than that<\/a>, but these days the rules are fairly clear and sensible<\/span> then you are \u201cresident\u201d in the UK, and subject to UK tax on all of your income and gains for that year.2<\/a><\/sup>Unless you are a “non-dom”, which is a whole other story<\/a><\/span><\/p>\n\n\n\n

The problem with this from some people’s perspective is that it becomes remarkably easy to stop being subject to UK tax. Simply quit the UK. Plenty of wealthy people skip the UK to move to tax havens, often just before making large capital gains.3<\/a><\/sup>It’s occasionally claimed that people don’t move in response to higher tax rates. Most of this is based on studies of people moving from relatively highly taxed US States to relatively lowly taxed states. It’s not applicable to the very wealthy moving to tax havens, which is hard to study statistically (too few people) but very easy to assess empirically (there’s no other reason a Brit would choose to live in Monaco<\/span> You can be sure we’d see more of that if the UK was about to introduce a hefty wealth tax<\/p>\n\n\n\n

Whether you call this \u201ctax avoidance<\/a>\u201d and\/or think it’s immoral is a personal question on which different people will have different views. But – as long as they are really spending 270 days abroad every year, and don’t come back within five, then leaving the UK is absolutely a proper, legal and 100% effective way to escape UK tax.<\/p>\n\n\n

The US alternative<\/h2>\n\n\n

The US does things differently – it has “citizenship-based taxation”. <\/p>\n\n\n\n

The way this works is that US citizens (and green card holders) are fully subject to US tax on their worldwide income and gains, no matter where they live. So you cannot escape US tax by moving to Panama. You can escape US tax by surrendering your citizenship – but that comes at the price of a hefty exit tax (which broadly eliminates all the immediate benefit of escaping US taxation).<\/p>\n\n\n\n

Interestingly there is almost no other country that does this.4<\/a><\/sup>People sometimes cite Eritrea, but that looks more like<\/a> gangsterism than tax<\/a>.<\/span><\/p>\n\n\n\n

But, on the face of it, if you want to stop billionaires from leaving the UK and escaping UK tax, this is the approach to adopt.<\/p>\n\n\n\n

(You may, alternatively, regard such an approach as immoral, and think that no country has the right to tax people who want to leave – but I’m going to park such political questions and look at the practicalities)<\/p>\n\n\n

Where citizenship-based taxation goes wrong<\/h2>\n\n\n

The problem is that you would be paying tax in two places. A Brit living in France would pay UK tax (because they are a British citizen) tax plus French tax (because they are resident in France). <\/p>\n\n\n\n

On the face of it, this shouldn’t be a problem, because the UK has double tax treaties<\/a> with France and most other countries which in principle stop you from being taxed twice on the same income. And certainty in a simple case where you have \u00a3100 of income then the US and UK won’t both apply their full rate of tax to that income. But the problems go beyond simple double taxation. <\/p>\n\n\n\n

We can get a sense of the issues by looking at the difficulties currently faced by US citizens (subject to US worldwide taxation) resident in the UK (and subject to UK worldwide taxation).<\/p>\n\n\n\n

Here’s how it goes:<\/p>\n\n\n\n