Originally published in Private Client Practitioner, Guernsey supplement, November 2008
Almost a year has passed since changes to the taxation of non-doms were first announced. These caused great concern in the private client industry. Jon Needham of SG Hambros looks back on the changes and how they have effected business in Guernsey.
Coincidentally it has now been almost a year since the 2008 pre-Budget report was published, which contained a fundamental change in approach by the UK government to the taxation of individuals who are resident but not domiciled in the United Kingdom.
The subject of domicile is solely a UK concept and I have to say, it is confusing to just about everyone. There are residency, tax residency, domicile and passport and none of them necessarily have to be the same. A little different to the US approach where once an American always an American, wherever you live and you are taxed accordingly (not that I am a proponent of this approach!). However, one has to admit that there is a lot to be said for the simplicity of the approach.
Thatcher and the non-doms
Turning back to the UK, the issue in respect of that eclectic group that have colloquially become known as "non-doms" in professional circles is nothing new. This issue was first flagged, believe it or not, in the early nineties by none other than
Margaret Thatcher, now Baroness Thatcher. Yes, the definition of the modern capitalist and creator of an economic model premised on low tax for the rich was in fact making the point that there was an inequitable treatment between UK domiciled individuals and those that were non-domiciled.
At the time this was met with a huge furore. The arguments that were applied, "bad for the City," "bad for the UK economy," "they will move somewhere else more accommodating" were the same ones used in 2008. The only difference in the early 90s was that the counter arguments were indeed listened to and the effect of the City of London and the wider economy i.e. employment, invisible earnings and indirect taxation were fully taken into account.
One of the most significant lobby groups at the time was the London based Greek ship-owners, some of whom had origins dating back well before the First World War but who clearly made a significant contribution to, not only the City but also to indirect taxation and employment. This both reinforced and upheld London's position as a pre-eminent centre of expertise for the world's commercial fleet and shipping more generally.
Whatever the rights and wrongs, not all of these arguments were listened to in 2008 and during the consultation period it became clear that there was a real lack of understanding of the salient issues. This culminated in a lengthy dialogue between the UK Government, HMRC and the UK financial services industry. Unfortunately many of the arguments put forward in the early nineties were simply dismissed (despite still having some validity) and eventually after some redrafting and a few "u-turns," the new regime came into force.
Simplistically, non-doms can now choose to be taxed on their worldwide income or retain the ability to be taxed on a remittance basis. The first option has a cost in terms of tax and with the second there is effectively an annual membership fee of £30,000 per annum, subject to passing a residential qualification test of 7 out of the last 9 years. One also has to make a positive election as to the basis on which one wishes to be taxed.
There are a number of other measures which need to be considered but which are too complicated to cover here.
Effect on Guernsey
So what has the effect been on the Channel Islands and Guernsey, in particular? The private client industry has endured these external pressures for some considerable time, arguably since Mrs Thatcher first mooted the idea of this change in the early 90s and as with any change "forewarned is forearmed." In other words we did have some considerable time to get used to the idea and have clearly faced a number of other threats in the intervening period from the EU and OECD to name but two.
That being said, the changes introduced last year have clearly impacted Guernsey and other Crown dependencies and whilst the full impact is yet to be seen, we have already seen some noticeable changes.
Firstly, a number of client structures became redundant as a result of the proposed changes. This was not necessarily because the planning behind the structure had become ineffective but more that the cost–benefit argument was either negative for the client, or at best increasingly marginal. As a result, most trust businesses would have experienced a net outflow of clients over this period, although from our experience at SG Hambros, this tended to be more towards the low value end. In an environment where resources are finite, this enforced re-balancing of the book was not necessarily unwelcome.
Secondly, Island authorities saw an increased interest from wealthy UK resident and UK resident non-domiciled individuals who were considering moving out of the UK and looking to Guernsey as a potential future home. This is clearly of benefit to the local economy and, I suspect, the full cost to the UK in terms of the numbers who have actually left and the true financial impact has yet to be fully measured.
A fall in business?
Looking forward, the acid test for the industry is "have the changes led to a drop in new business?"
Clearly, I can only comment from the SG Hambros perspective and I have to say that we have been pleasantly surprised by the results. Since the changes came into effect our private client business has continued to flourish. Indeed in the first six months of 2008, we booked more new business than we did in the whole of 2007.
Admittedly this is not all in relation to UK resident non-domiciled individuals (but some was) but then this was never the case in any event as our business today is more diverse and has a greater global reach than even 5 or 10 years ago.
The positive side of this is that the Island's finance industry, along with those of other Crown dependencies, continues to show remarkable resilience and an uncanny knack of being able to reposition and at times re-invent itself. This is a testament to the quality of our industry, the legislative and regulatory framework and the quality of the resources we have at our disposal.
Importantly, the UK remains attractive to the seriously wealthy and from our experience, whilst the tax environment is a key factor, it is not the sole consideration. Increasingly we are finding that tax holds only a modest position in most clients' "batting order" as they acknowledge that as with anything else there is a price to pay.
As one client said to me: "£30,000 is not that bad – where I come from I pay that for my golf club". This is not a glib comment but I guess this puts this whole topic in perspective when considered in the context of the wealth that many have at their disposal.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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