Tax treaties to defeat non-dom tax regime?
Some international tax treaties could prevent the UK from taxing certain types of non-dom’s unremitted income say accountants Baker Tilly. “This raises fresh doubts as to whether the UK’s proposals have been properly thought through”, said George Bull, its head of tax
The UK's proposals aim to tax non-domiciles on their worldwide income and gains if they have been resident in the UK for more than seven years. UK taxes on overseas income and gains can be limited to amounts brought to the UK, provided the individual in question pays an additional £30,000 each year to HM Revenue and Customs (HMRC).
Bull explains the latest problem for HMRC in making these new proposals work: “the UK has a wide range of treaties with other countries which are designed to avoid double taxation and to spell out which country can tax what income. These treaties override domestic law. Most tax treaties contain rules that dictate, for example, how income from property is taxed. Generally, tax is payable only in the country in which the property is situated. This relates particularly to some of the UK’s established and growing trading partners such as the USA, Germany and India. As a result, UK-resident non-domiciles who continue to own and let a property in their home country will frequently find that this income is not caught by the new UK rules. If that is the only overseas source of income, they may be able to thumb their noses at the new UK rules.”
The tax treatment of overseas interest and dividends is more complex, but tax-sparing and tie-breaker provisions in the treaties generally exclude income from double taxation. It is only in cases where both countries tax the income that the surcharge becomes relevant. This remains the case even if the income arises in a third country (e.g. a Jersey bank account) because the surcharge is not relevant to taxation in the country where the income or gains arise but in the country where they are taxable.
The vast majority of non-doms in the UK are working and under PAYE. In theory many of these who have been long term resident in the UK will lose their personal allowances on 6th April if they continue to use the remittance basis for overseas income.