Will Hutton. Seriously Confused.

No, really, very seriously confused.

Labour could even have copied the ultra-capitalist Swiss and introduced a small wealth tax levied annually, including on super-rich foreigners living in Britain who enjoy the right to be considered \’non-domiciled\’ and so excused taxation on British income and assets.

Err, non-doms are not excused taxation on British income and assets. They\’re excused taxation on foreign income which they do not bring into the UK. Getting it 100% the wrong way around is pretty bad for a columnist, don\’t you think?

Rather, the take should be raised and the loopholes closed that let much property to be held offshore.

Now I\’m on slightly shakier ground here but I think that again Will has misunderstood the role of domicile here. Indeed, I think this is part of the very reason that we do distinguish between domicile and residence. So you\’re a UK citizen: you can\’t become a non-dom and still live in the UK. You actually have to give up UK citizenship and bugger off elsewhere. (If I get some of this wrong please do correct me.)

Now, if you are a UK citizen and you do bugger off elsewhere, you don\’t have to prove that you are resident elsewhere in order to show that you are non-resident in the UK. Just being out of the country for the requisite number of days in the tax year is enough.

However, to prove that you are not domiciled in the UK any more you do have to prove that you are domiciled elsewhere. That you\’ve got a new citizenship, that you really do live elsewhere and expect to die elsewhere and be buried there (is, I think, the normal formulation).

Now, any property that you own in your own name in the UK (yes, of course trusts can be used to disguise this) is, if you are non-domiciled and non-resident, not taxed by the UK as part of your estate. The assumption is that the other taxman gets his cut. But if you are non-resident but still domiciled then your UK property is indeed subject to inheritance tax.

As I say, I\’m on slightly shaky ground here as I\’m not a tax expert but that\’s what I think happens. And why would the law have been drawn up in this manner?  Why, so that death duties would apply to the great landed estates of the past. If the 4th Marquess of Chinlessness went off to Monaco in order to flee 98% income tax, that was one thing. But unless he then went on to become Monegasque then his 500,000 acres still faced death duties on his expiry and his heirs would have to sell up the great landed estate. That, I believe, was actually the point of devising the tax system this way.

If you want to change the whole set up about domicile and residency, fine, carry on: I\’m not sure that it really matters all that much either way. But it would be nice to see an admission that there\’s more to it than getting hands on some of The City money. It will also mean not getting hands on  some much older money (although this specific example doesn\’t count now as farmland doesn\’t pay IHT).

Back to Will\’s clear and obvious confusion:

Extraordinarily, inheritance tax is felt to be unfair. There is one good reason for this: more than 70 per cent of the take is paid by people inheriting estates of half a million pounds or less.

A point I have made often: the actual rich don\’t pay it. So what should we do?

Labour, of course, should have seen this coming. It should have protected its position by making the case for inheritance tax morally, socially and economically at the same time as designing the system so that it was much fairer. The eligibility threshold for inheritance tax should have been raised, while simultaneously making the rates sharply progressive.

Not so sure about the progressivity but still, OK; we should raise the threshold.

Which is why the emerging consensus that inheritance tax is unfair and should be reduced, if not abolished, (which Shadow Chancellor George Osborne exploited so successfully last week in his proposal to lift the threshold to £1m) is so odd.

Osborne\’s raised the threshold so that it is indeed only the rich that pay. Those with less than £500,000, what we might in these days of house pricing, call the middle classes, don\’t pay 70% of the take any more.

Excellent, so Osbourne has followed the advice of Anthony Giddens, Third Way Guru.

Yet Will thinks this is a bad idea.

Tell me, is it actually a requirement to be ill informed and contradictory to write on economics and taxation for The Observer? I thought those were afflictions reserved for blogs?







8 thoughts on “Will Hutton. Seriously Confused.”

  1. Tim,

    Everyone starts off with a domicile of origin, which is the country or state in which your father was domiciled. A domicile of origin can be replaced by a domicile of choice, but this is hard to do: your domicile of origin is difficult to shake off. However, citizenship isn’t as critical to domicile status as you seem to think: there are lots of British citizens who are accepted by HMRC as domiciled abroad, and this includes many who were born here.

    What this means is that for income tax and CGT purposes (“deemed domicile” puts the worldwide estates of long- UK resident non-doms into the UK IHT net) there are two classes of UK citizens, broadly speaking the indigenes and immigrants and their children (and possibly grandchildren, too.)

    Imagine if a method of reducing UK income tax bills were only available to people all of whose grandparents had been born in the UK. It would be called racist, wouldn’t it?

    Tim adds: “there are lots of British citizens who are accepted by HMRC as domiciled abroad, and this includes many who were born here.” That I know: one point I was trying to m,ake is that you can’t have started as UK dom then become non-dom “and still stay in the UK earning”. All these people with non-dom status in The City must have started out as non-doms.

  2. Tim, your summary on residence and domicile is as good as anybody else’s, it’s a mighty tricky are.

    THe first few letters on each line are still being chopped off, BTW.

  3. There was a caller on “Any Answers” (BBC Radio 4) yesterday, holding forth about the immorality of inheritance itself. No-one, he exclaimed, should have any rights over their assets after death, they only use it to look after their own offspring.
    What shocked me was the breathtaking conviction of his self-righteousness. To a man like him, liberty itself is a social evil, to be stamped out, property rights shouldn’t exist, and dissent should be abolished. Somehow it hadn’t dawned on him that his very freedom to air his obnoxious views on a national network would vanish in the collective utopia he so longs for. It was a perfect exposition of envy, greed, and spite.

  4. Re the Swiss “wealth tax”

    Taxes in Switzerland are negotiable if you are wealthy. Its kind of like the way you can ask the cook for a discount for quantity if you buy 10 pizzas instead of 1 pizza and you’re buyinf on a wet monday when the guy isn’t getting much business anyway.

    I don’t have all the details – not being either swiss or living there – but I have been told by various people that the wealthy “non-doms” as well as companies and other entities who could potentially up sticks and deprive the Swiss cantons of tax revenue are able to agree in advance how much tax they will pay for the next few years or what the tax rate will be or similar. The big catch in Switzerland is that they will expect to to make that commitment so if you agreed in Jan 1999 to pay 1 million CHF a year for the next 10 years based on your valuable tech stock and options you will either be paying that even if the companies turned titsup.com in 2000 or finding that your swiss hosts are now seizing your possessions and potentially your person until you do make the payment.

  5. Deemed domicile for IHT is simple: three years out of the last 20 spent outside the UK. If you want to escape IHT, die abroad after leaving the UK for 3 years.

  6. “Extraordinarily, inheritance tax is felt to be unfair. There is one good reason for this: more than 70 per cent of the take is paid by people inheriting estates of half a million pounds or less.”

    This, and your comment agreeing, is nonsense. 76% in 2003/2004 was paid by estates OVER £0.5 million.

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