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13 Feb, 2008

Published: 10:09 Wednesday 13 February 2008
By: Michelle McGagh, News Reporter

Chancellor Alistair Darling has had to retreat from a proposed tax clampdown on resident non-domiciles (RNDs) after the financial industry warned that wealthy foreigners were preparing to quit the UK.

An advantageous tax regime for RNDs has brought an estimated £125 billion in investment and business to the country but Darling's proposal to make them disclose details of their offshore income even if it was not being remitted in the UK had left many considering a new country of residence.

Although the Chancellor has confirmed that RNDs will not have to disclose any offshore income, they will still be liable to the £30,000 levy set out in the pre-Budget report.

Those living in the UK pay tax on income earned in the country but not on money earned outside of the UK; the £30,000 will preserve that. Darling hopes to raise £800 million form the fee.

But many tax experts believe that the u-turn comes too late, with many people already considering moving their business and investment to a more tax advantageous country.

According to a survey by Society of Trust and Estate Practitioners (STEP), more than £40 billion of investment could be lost from the UK.

STEP surveyed 85 members who advise a total of 22,000 resident non-domiciles with a combined investment of £44.87 billion. They make up 19% of the total number of RNDs in the UK that have an estimate investment of £125 billion.

Over a third of RNDs said they were leaving or considering leaving the UK after the chancellor changed the tax position for overseas trusts and companies to make them liable to an 18% capital gains tax (CGT) charge whether or not the money is brought into the UK. The gains were previously not taxed.

Of those planning to leave the UK, 2,741 are ultra-high-net-worth individuals with investable assets of over £15 million and represent over half the super wealthy in the UK.

Keith Johnston, STEP director of policy and communications, said the cost to UK investment could be significant.

'Our membership is very unhappy with the tax proposals,' he said. 'Many will be hit with a huge tax bill because of the CGT changes and will simply decide to sell their UK assets or move their companies out of the UK.'

For those thinking of leaving, Switzerland was the most popular alternative - 78% of members said their clients would move there to take advantage of a tax bill that is based on the cost of living.

Of the reason for leaving, 27% of STEP members said a loss of confidence, 20% said the CGT changes and 18% cited the credibility of the £30,000 levy.

Around 68% of members said a statutory residence test for RNDs should be introduced so that there is no room for misinterpretation or change in their tax positions.

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