Why is the UK home to so many wealthy exiles? As foreign nationals - resident but not domiciled here - they can structure their affairs so as to pay little or no tax. By Lorna Bourke.
While most of us sit around groaning about high levels of taxation and worrying what Tony Blair might do to make matters worse, there is a group of individuals who enjoy a millionaire lifestyle, have income running into tens, if not hundreds, of millions of pounds a year and pay little or no tax.
How? They are foreign nationals, resident, but not domiciled, in the UK. 'Under current rules, if you are not domiciled here, it is possible to structure your affairs so that you have a capital account and an income account,' explains Joyce Smith of solicitors Theodore Goddard. 'If you only make drawings on the capital account you pay no income tax here at all.' Accordingly, many of Smith's clients who range from rock stars to Arab sheiks choose to be resident here because of the UK's advantages as a tax haven.
For superstars and mobile entrepreneurs, tax is a negotiable expense - at worst an irritation but often more or less voluntary. Many probably pay more to their advisers in fees than they pay to the Revenue in tax. They are not alone in viewing the UK as a tax haven. 'There are many individuals in the Sunday Times list of Britain's richest 500 people who are potentially tax exiles,' confirms George Yeandle, tax partner at Coopers & Lybrand.
Businessmen such as the Swedish brothers Hans and Gad Rausing who, as owners of the packaging group Tetra Laval, are between them estimated to be worth around £4 billion, are potential beneficiaries of the UK's benign tax regime - though they are not prepared to discuss their affairs. They have been resident in the UK since the 1980s, having come here to escape the punitive rates of tax in Sweden. Gad has recently moved to Switzerland, though Hans continues to live on his farm in East Sussex. He could easily be living off capital, keeping most, if not all, of their income offshore.
Very few individuals born in Britain can take advantage of these tax breaks as, in order to do so, you need to be non-domiciled in the UK. Domicile is very hard to get rid of - even if you have been non-resident for years.
Those who benefit most are foreign nationals whose earnings are from investment income, or from some offshore activity which is itself carried out in a low corporate tax regime. If the income from investments 106e is kept separate from the original capital, and only capital is remitted to the UK, it is possible in theory to pay no tax at all.
'In practice it is a little more complicated than that,' cautions Yeandle. 'Tax tends to be negotiable because of the immigration laws. There is a trade-off between obtaining the right to reside in the UK, bringing in a certain amount of capital, and paying some tax. The group for whom the UK tax rules are most beneficial are foreign nationals who retire here and have substantial assets elsewhere. They will be taxed on a remittance basis.' Foreign nationals for whom the tax regime is slightly less beneficial are employees of UK or overseas firms who are resident in the UK. They can probably engineer their affairs so that they earn a significant proportion of their salary offshore and avoid UK tax on these overseas earnings. 'The UK is a tax haven to the extent that they have duties and responsibilities outside the UK. They will then pay tax in the UK only on that part of their income earned here,' says Yeandle.
The UK tax rules do not benefit everyone. US citizens are taxed on their worldwide income, albeit with allowances where there are reciprocal agreements. However, some, particularly rock stars, are able to put their peripatetic lifestyle to financial advantage. If, for example, they are able to record eight tracks on an album in eight different locations, and keep moving fast enough, it is possible in theory to be non-resident anywhere and pay little or no tax - perfectly legitimately. As this way of life soon becomes exhausting, most settle down in one place.
Yet taxation is clearly not the only criterion when deciding on residence. 'Many Arabs pay no tax at all in their own country, but prefer to become resident in the UK and pay some tax because they regard it as a better place to live', observes Yeandle. Conversely, there are plenty of UK tax exiles who eventually abandon their haven in Switzerland or the Cayman Islands - or even nearer to home in the Isle of Man or Channel Islands - because of homesickness. The majority of us, who, domiciled and employed here, have no choice, can only look on in envy.