A regime ripe for reform – but not like this
There is a great deal of support for abolishing domicile as a fiscal connecting factor for tax purposes and replacing the remittance basis of taxation with a much-simplified residence-based regime. In principle, everyone can agree with Labour that the tax system should be made fairer: “If you make your home and do your business in Britain, then you should pay your taxes here too”.
However, any changes to the system need to strike a balance between “fairness” and maintaining the attractiveness of the UK to the super rich (and their incoming capital) and highly skilled individuals that the UK wants to attract for their contribution to the UK economy.
The importance of non-doms to the UK
UK resident foreign domiciled individuals pay a huge amount of tax in the UK, even if they pay their taxes on a different basis. HMRC recently estimated that at the end of the 2023 tax year there were 74,000 non-doms in the UK paying a total of £8.9 billion in tax, which is likely to be an understatement, since not all deemed domiciled taxpayers have to indicate their deemed domiciled status on their tax return.
Non-doms also contribute to the UK economy (and tax yield) in other ways: they pay VAT on expenditure, invest in UK businesses and property, employ people in the UK (PAYE and NICs), send their children to UK schools, and donate to UK cultural institutions, often through their own charitable foundations. The Rausing family alone is associated with the Arcadia Fund, the Lund Trust, The Julia and Hans Rausing Trust, the Sigrid Rausing Trust and The Alborada Trust. Migrants represent a significant percentage of the super-rich generally and also those in high income, high productivity occupations in financial and professional services in banks/hospitals alike. Research from the University of Warwick and the LSE found that 97% of non-doms were either born abroad or had lived abroad for a substantial period of time and that 23% of non-doms worked in finance. Given the importance of the financial sector to the UK, no one wants these people to leave.
Sensitivity to tax policy
Although some academics believe that tax reforms have minimal impact on migration and preferential regimes can be safely abolished without causing an exodus of HNW individuals, data from Switzerland shows that high net worth (“HNW”) individuals are in fact highly sensitive to changes in tax policy.
Between 2010 and 2014 some Swiss cantons abolished expenditure-based taxation whilst others chose to retain it (referendums were held). In a 8 February 2023 study entitled “Behavioural Responses to Special Tax Regimes for the Super-Rich: Insights from Swiss Rich Lists”, published as EU Tax Observatory Working Papers No 12, Enea Baselgia and Isabel Z. Martinez conclude that the abolition of expenditure-based taxation resulted in a medium to long-term decline of about 30% in the stock of super-rich in reform cantons while the number of Swiss born super-rich remined the same. In addition, they concluded that their study showed for the first-time evidence of how sensitive super-rich foreigners are to tax policy when it comes to choosing where in Switzerland to reside and that the 30% decline in the cantons that abolished the preferential tax treatment was mainly driven by the new arrivals who chose to move to those cantons still offering them tax privileges.
Other studies show that tax policy drives international migration among top footballers and athletes and acts as a ‘pull’ factor to bring highly skilled expatriates back to their countries of origin. It is therefore concerning that the UK’s current proposed replacement regime offers only very short-term benefits and that the projected yields fail to account for the economic impact of those HNW individuals who will either not now come to the UK or who will leave as a result of these seismic tax changes. UK tax advisers have seen enquiries from clients wanting to come to the UK dry up. The UK will lose not only individuals’ income tax and wealth contribution, but also the indirect taxes and the taxes paid in the UK by related companies.
Non-dom telecoms entrepreneur Bassim Haidar, a Lebanese citizen, told The Guardian in May, “I am moving – that is it” and said that ‘he had formed a working group of 29 non-doms, who mostly planned to leave the UK before September so that they could secure places for their children in private schools in their new countries before the start of the academic year’. He has also cancelled his plan to list financial services company Optasia on the London Stock Exchange and pointed out he would have to make his household staff redundant on his departure. Another loss would be businessman Wafic Saïd, who we understand plans to leave for Abu Dhabi if the changes go through as proposed. His position is that it would be reasonable to charge a large forfait along Italian lines, but that the current proposals are absurd.
Approach to reform
When it comes to reforming the tax system, the government must bear in mind:
a. There is a finite tolerance level for paying more tax, but perhaps more importantly the lack of certainty and the frequent rule-changes have given rise to distrust and suspicion. According to Jon Elphick, international tax adviser at Mark Davies & Associates, “The mood among clients is disillusionment. We’ve experienced a significant uplift in clients asking about relocations – and what their tax positions would look like if they were to move.” Jon Shankland, private wealth partner and tax lawyer from national law firm Weightmans, said, “This is putting the financial best interests of our country at risk needlessly. Wealth is already leaving the country. Part of that is genuine fear that Labour’s approach will be very hard line, but for many it’s not knowing where they stand that’s causing nervousness.”
b. Extrapolations cannot be drawn safely from previous changes to the non-dom regime in the UK, because the changes now proposed are so radical. The 2017 UK changes were deliberately designed not to cause an exodus. This was why an individual could benefit from the remittance basis for 15 years, there were trust protections for income tax and CGT and the excluded property regime for trusts was retained.
c. Inheritance tax exposure is crucial to the super-rich. In the US, academic research has shown a positive correlation between a state imposing federal estate duties and a taxpayer leaving that state. One European non-dom businessman recently told the Financial Times: “The UK’s inheritance tax of 40 per cent on your global assets is a real problem. It’s the overall instability that has been the nail in the coffin for me. If there was a more balanced, less punitive inheritance tax I might have considered staying.” Instead, he is moving his family from London to Switzerland after more than a decade in the UK. Subjecting an individual with no other links to the UK to worldwide inheritance tax after being resident in the UK for just 10 years is both unfair and unworkable. The lack of grandfathering for existing excluded property trusts has caused extreme disappointment.
The UK government, before introducing changes to reform an ineffective system, needs to understand all sectors of society that the changes will impact. These changes are too important to the UK’s global economic prosperity to be used for political point scoring, especially since a new government elected with a large majority should be in a strong position to take its time to get this right.
Against a backdrop of Brexit and increasingly less favourable immigration rules, the UK tax system is fast earning a global reputation for being uncertain and unwieldy and too easily and often used as a political weapon.
A new tax regime that an individual can only benefit from for four years (at best) is not going to be attractive to the super-rich and the high-level decision makers within multinationals. For those looking for an attractive tax regime who want to stay for a reasonable period of time (to not disrupt their children’s schooling for example) the UK is no longer attractive. Other jurisdictions will be more attractive, meaning that their capital and that of the businesses they are connected with will go elsewhere too.
Given that it is UK government policy to welcome and encourage foreign direct investment, proposing a new tax regime that discourages wealthy foreigners from coming to the UK suggests a lack of joined-up government. Can the UK really be ‘the best place in the world for international investors’ (the stated ambition of the government’s Office for Investment) when international investors are “petrified” and “jumping on planes right now and leaving”? Similarly Christopher Groves, a partner at Withers, quotes a non-dom client who describes the proposals as “Arrogant and short-termist and very damaging to the UK’s image as a good place for international wealth creators” and who is now questioning their decision to expand their international business in the UK.
Global competitiveness
We need to remember that UK tax policy does not exist in a vacuum. There is active global competition to attract the wealthy, skilled and highly mobile individuals.
In Italy, super-rich migrants need only pay a flat tax of €100,000 per annum (expected to rise to €200,000 from next year – indicative of how popular the scheme has proven) to shelter foreign income, gains and assets from all Italian taxes, provided a simple one-page compliance form is filed on time and the tax paid for each year (a qualifying individual can benefit for a maximum of 15 years).
JHA clients have expressed interest in moving to jurisdictions including Monaco, the UAE and the Bahamas where they will not be subject to income tax, wealth tax, capital gains tax or inheritance tax.
Some Swiss cantons still offer an expenditure-based regime explicitly aimed to attract the super-rich). Our nearest neighbour Ireland has a remittance basis regime (applying to foreign income and gains) very similar to what the UK had prior to the April 2008 changes. Israel, Malta, Greece (where non-doms are required to invest a minimum of €500,000 into Greek real estate, bonds or stock) and Thailand also have special regimes designed to attract the wealthy.
The regimes available in other jurisdictions are more competitive – and these countries are perceived to be more politically predictable, financially appealing and above all welcoming.
Recommendations
Our firm recommendation is therefore that the proposed legislative changes should not be effective until at least 2028/29 to allow time for extensive consultations on: (i) policy, with far more consideration of the wider economic impact than has so far taken place; and (ii) the technical details of the legislation. Swiftly drafted legislation by a draftsman operating in a vacuum is not desirable.
In our opinion a system like the Italian system would be desirable. However, we feel that the UK could look to charge: £200,000 per annum in the first 5 years, £300,000 per annum in the second five years and then £500,000 per annum for the last 5 years.
We also think that to avoid the cliff edge in the Italian system where the super-rich leave after 15 years, for a charge of £1 million per annum individuals should be able to benefit indefinitely from the current trust protections with respect to income tax and CGT and for IHT excluded property status on trusts.
These individuals would therefore be paying significant UK tax but, from the research to date, not so much that they would leave. There would be a significant tax increase and the UK’s economic competitiveness would be maintained.
Joseph Hage Aaronson LLP
September 2024
To discuss this report further please contact:
Helen McGhee: [email protected]
Lynnette Bober: [email protected]