How to solve the UK’s non-dom conundrum
After industry experts poured cold water on Reform’s ‘Britannia Card’, and amid rumours the Chancellor is examining options to row back on elements of her non-dom reforms, Ali Lyon asks what policies might be on the table – and whether they will work.
As Nigel Farage stepped up to a mundane-looking podium in a stuffy Westminster conference room last Monday, the entire SW1 establishment braced for what was sure to be another awkward blow to the increasingly pedestrian-looking government.
Having spent several months attacking the Labour party from its left, calling for the nationalisation of British Steel and a U-turn to the winter fuel allowance cuts well before the government confirmed either, Westminster’s poltergeist-in-chief was ready to change tack.
Dozens of party apparatchiks and political journalists had shuffled in, eager to hear his next headline intervention: how he and his business acolyte Zia Yusuf planned to stem – in his words – the “catastrophic… very rapid exodus” of wealthy investors and non-doms from Britain.
But unlike Farage’s politically prescient calls on saving the UK’s last remaining steel blast furnace and maintaining pensioner benefits, Reform’s unorthodox solution to keeping ultra-high net worth foreign investors in the country fell flat. It was immediately ridiculed by industry experts, who variously dismissed it as unworkable “political theatre” or just plain “bonkers”, and the Chancellor branded it a “huge tax giveaway to foreign billionaires”.
Even pro-non-dom campaigners privately conceded the scheme – dubbed the ‘Britannia Card’ – was too generous to the ultra-wealthy investors it intended to keep in, or lure to, the UK.
Under the policy, super-rich foreigners that stumped up £250,000 for a one-off “landing fee” would be granted the right to live, work and invest in the UK for a decade without any of their foreign income or overseas assets being subject to British taxes.
“The UK will become incredibly attractive to the internationally wealthy,” Yusuf said as he ran the press conference attendees through the detail of the card. “But,” he added, “they must contribute immediately to the prosperity of the country.”
That contribution comprised the second unorthodox element of Reform’s offering. For rather than going into the coffers of HMRC to help fund frontline services or public infrastructure, the scheme’s proceeds would instead be wired directly into the bank accounts of Britain’s lowest earning 10 per cent of full-time workers.
If the primary goal of the unconventional policy was to generate media attention, then the bombshell announcement served its purpose.
Wealth advisers, tax lawyers and non-doms themselves had been warning for months that the Chancellor’s decision to abolish the centuries-old non-dom regime had sparked a mass exodus of its former users. Countless column inches had been devoted to research unearthing the extent of the departures, and high-profile instances of former non-doms trading in Britain for other jurisdictions – like the UAE, Greece or Italy – with competing foreign investor schemes.
Thus, every broadsheet newspaper leapt on what was the first concrete attempt from a major party to offer a solution.
It was an intriguing piece of political messaging, which sought simultaneously to gain the approval of both extremes of the country’s wealth spectrum and quickly earned it the moniker of the “Robin Hood tax”.
But as the very advisers and lawyers who had been urging the government to change course on its non-dom reforms chewed over the detail, objections began to coalesce around what they saw as two major flaws to the eye-catching policy.
Reform’s non-dom problems
The first surrounded how much Reform had decided to charge foreign investors for the ‘card’.
“It’s way too cheap,” James Quarmby, founding partner of Stephenson Harwood’s private wealth practice, told City AM.
The regimes in place in both Greece and Italy both charge considerably more than Reform’s offer.
Claimants of Italy’s ‘Flat Tax Regime’ – which has successfully lured the likes of Goldman Sachs banker Richard Gnodde and Aston Villa co-owner Nassef Sawiris from Britain in recent months – are charged €200,000 (£171,600). Meanwhile those in Greece must pay €100,000 and prove they have invested €500,000 in the country’s domestic economy.
And yet netted out annually in the way both Italy and Greece’s schemes are, Reform would charge just £25,000 a year, despite, in Quarmby’s eyes, the UK having “way more to offer” to the well-healed foreigners who take them up.
Reform’s Britannia Card is way too cheap. The UK has more to offer than Italy or Greece.
Another issue – identified by think-tank-cum-pressure-group Tax Policy Associates founder Dan Neidle – could be its significant fiscal impact.
Neidle, the former head of tax at magic circle law firm Clifford Chance, chalked up the loss to the Exchequer as being an astronomic £34bn over five years, as it would offer a “very large” windfall to wealthy foreigners currently in the UK. Rather than paying tax on their worldwide assets and income as they would do currently, Neidle says the scheme as its currently structured would allow them a simple route to avoid that, costing the taxpayer billions in lost receipts. Reform’s Yusuf hit back, attacking the ‘far left’ critics of the policy and claiming that Neidle – a former Labour party official – is “poisoning the discourse in this country”.
And the final objection experts have identified centred around the move to dish out the proceeds from the card directly to the lowest-earning households in the country. While the message may be politically compelling, tax researchers like the Institute for Fiscal Studies’ Stuart Adam, said it would inescapably entail “serious administrative challenges”.
Given the proliferation of in-work benefits that many low-paid workers are eligible for, HMRC would inevitably struggle to identify which low-paid workers should be in line for the cash bung, Adam said. It would also “discourage low earners from increasing their earnings” for fear of missing out on eligibility for the bung.
In search for solutions…
But if Reform’s answer to one of the UK’s most pressing fiscal conundrums is unworkable in the eyes of some, what are potential solutions that might stem the level of departures that have accelerated from ‘stream’ to ‘flood’?
The timing of Reform’s announcement did not go unnoticed by some in the tax advisory circle, with Victoria Price, head of private wealth at City audit firm Alvarez and Marsal, branding it as “political theatre”.
Because just a week before Farage’s intervention, the Financial Times reported that the Chancellor was considering whether to change one of the more contentious and far-reaching elements of her changes to the erstwhile non-dom regime: the treatment of inheritance tax.
Under the current changes, which came into effect in April, the foreign trusts held by former non-doms who have been in the UK longer than 10 years are subject to UK inheritance tax.
City AM understands Treasury officials are examining several different options to get a handle on the level of high-net-worth departures, of which reversing that inheritance tax grab would be the most radical.
According to official estimates from the Office for Budget Responsibility, doing so would cost the Exchequer just £450m in lost receipts. In return, the government would bring an end to what many tax lawyers and wealth advisers – including Dominic Lawrance, a partner in the private client division at Charles Russell Speechlys – have held up as the main factor behind decisions to leave.
It is understood that Gnodde’s departure to Milan was – over and above anything else – driven by changes to his inheritance tax (IHT) liability. And Magda Wierzycka, the billionaire co-founder of South African investment firm Sygnia, has told City AM she would abort her plans to leave the UK if Reeves went ahead with the IHT reversal.
But while this minor fiscal tweak would keep wavering non-doms like Wierzycka in the UK, Lawrance argues it would take something more radical to coax new wealthy foreigners to Britain’s shores.
“A tiered tax regime (TTR) would be the best option,” he says. “An Italian lump sum regime would be a viable alternative, but the huge benefit of the TTR is that, although it would still be attractive to internationally mobile wealthy individuals, it would be progressive – those with broader shoulders would bear more fiscal weight.”
The TTR would calculate the level of flat tax owed by wealthy foreigners based on their overall net worth. Under the top band, those worth more than £500m in assets, would pay an annual charge of £2m, a considerable boost to the Treasury’s coffers. Meanwhile those with a lower net worth of ‘just’ £100m or less would pay £200,000.
| Net wealth up to £100m | £200,000 charge |
| Net wealth between £100m and £250m | £500,000 charge |
| Net wealth between £250m and £500m | £1m charge |
| Net wealth over 500m | £2m charge |
Lawrance’s scheme is also the one being endorsed by Foreign Investors for Britain, a lobby group for non-doms which was set up in the run-up to last autumn’s Budget. The body’s chief executive, Leslie Macleod Miller, has taken Oxford Economics research to No 10 that projects the scheme could raise roughly £11bn.
But it has its detractors.
“I can see the logic behind it,” Anthony Whatling, managing director of Alvarez and Marsal’s tax practice, tells City AM. “But one of the problems is that it’s very hard to get full disclosure on what people’s wealth is. And if you’ve got business interests or property, then it might be quite easy to fudge the valuation if it got you into a lower tier.”
Instead, Whatling believes a nimbler solution would be to significantly extend the amount of time wealthy foreigners are able to stay in the UK under the non-doms’ replacement scheme, known as a Temporary Repatriation Facility, which lasts four years.
“You’d need to charge them a bigger fee, but people would come if you had a 10-year programme,” he says.
Whatling believes the government could charge north of £250,000 a year, 10 times the amount Reform’s policy is charging, and still attract.
But given the amount of time that has passed since non-doms and their advisers began sounding the alarm of an exodus just under a year ago, others are sceptical a U-turn of any sort be that from the government – or an insurgent Reform UK – would have the desired effect.
“Frankly, if they were to do something then it would be a step in the right direction,” says Lawrance. “But there is an element of the stable door having been open for a while now. A lot of the horses have bolted.”