By Ellen Kelleher
Financial Times Published: November 18 2007 17:58 | Last updated: November 18 2007 17:58
Foreigners and their employers are increasingly worried that the new tax treatment they face will be so expensive it will not justify staying, say accountants and solicitors.
³We are certainly getting a lot of interest on the matter from both individual clients and their employers who often make up the difference in tax when they move people to the UK,² says John Whiting, a tax partner at PwC.
³We¹ve had a number of individuals say they will have to look at this very carefully with the view that it may cost them too much to stay. It may take them a while to move, but it is on people¹s agendas.²
There are about 114,000 people claiming non-dom status in the UK, according to the Treasury, which says one in six of Britain¹s highest earners is foreign-born. After April 5, those who have lived in the UK for more than seven years will pay an additional flat rate charge of £30,000 a year if they want to avoid paying tax on their overseas income and capital gains.
Those non-doms who are most concerned by the pending changes are the ³middling² rich working in the City who have less than £1.5m in assets, accountants say.
³There¹s a perception that these changes only apply to the very rich, but the fact is they are going to affect working people,² says an American who has worked in the City for 23 years and is now looking to move his family back to New York.
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A number of questions remain unresolved, accountants and barristers say. Americans, who already pay tax on worldwide income to the US government, could face double taxation in some instances unless US and UK regulators agree to amend their tax treaty and introduce new credits, for example.
Americans with holdings in mutual funds and hedge funds who do not pay the £30,000 fee and accept UK taxation on worldwide income could be affected severely, says Christopher Groves, a partner at Withers, the UK law firm.
³US investors will therefore be prohibited by the US rules from investing in UK qualifying funds and by the UK rules from investing in the US qualifying funds,² says Mr Groves. ³Consequently, investing in mutual funds will be very unattractive for US citizens resident in the UK.²
Also, there is a sharp difference in the way UK and US tax authorities treat hedge funds.
Americans who put money in US hedge funds structured as a so-called limited liability company pay tax on the income and gains of the fund each year. In the UK, however, investors pay tax when they dispose of their interest in the fund and their accrued income and gains since purchase are taken into account at that time, according to Withers.
³This is going to present big compliance issues,² says Mr Groves. ³Resident non-doms will have to restructure their offshore investment portfolios so that they are UK tax-efficient.²
In addition to meeting accountants and solicitors, an increasing number of foreigners are reviewing property portfolios, report estate agents at Douglas and Gordon, and Knight Frank.
Some wealthy non-doms who control offshore companies, or trusts which own properties are even looking to make a quick sale of the property before their tax status changes in April.
³I have a non-dom client with a three-bedroom penthouse apartment in Knightsbridge worth £4.75m who told me I had to sell the property by the end of March before the rules on his tax treatment change,² says Rupert des Forges, an agent in the Knightsbridge office of Knight Frank.
If more non-doms sold properties in London it could affect the slowing housing market, according to housing economists. About 66 per cent of prime London properties worth more than £2m are owned by foreigners.
From April, any non-UK citizen who has lived here for more than seven years will be taxed on their overseas gains or required to pay an annual flat charge of £30,000, writes Elaine Moore. The government thereby hopes to raise £800m in 2009-10.
The Conservatives say their own, very similar, proposals for non-dom taxation would raise £3.5bn. The Conservatives assume that, of 150,000 non-doms affected, 130,000 would be wealthy enough to pay an annual charge of £25,000.
But the government says only 114,000 non-doms submitted tax returns in 2005-06. It claims only 20,000 will be affected, of whom 4,000 will be wealthy enough to pay the charge.