Ultra wealthy foreigners residing and working in Britain should brace themselves for a more stringent tax regime after next month’s UK elections, no matter which party comes to power
Wealthy foreigners should be prepared for a more stringent tax regime if they want to live and work in Britain, whether the Conservative, Labour or a coalition party gets into power in next month’s UK elections.
At least, this is the opinion of senior lawyers, tax experts and accountants, in reaction to Labour party announcements to scrap non-dom rules and bring in a mansion tax from April 2016, if they come to power.
This weekend Labour leader Ed Miliband and shadow Chancellor Ed Balls set out a detailed 10-point plan to raise £7.5 billion (US$10.9 billion) from tax evaders, including the abolition of the non-dom status, stamp duty loopholes and “carried interest” rules.
“The announcement was not a complete surprise,” said James Hender, head of private wealth at accountancy Saffery Champness. “Governments of both hues have been trying to extract more and more tax from non-doms for six or seven years now.”
The non-domicile tax status, a 216-year-old rule that allows non-domiciled British residents to not pay tax on international earnings – has long been a bone of contention. The law is often used by the international wealthy to reduce their tax bills and it also means that successful individuals are attracted to the UK to headquarter their businesses.
It is estimated that wealthy foreigners contribute as much as £8 billion (US$11.68 billion) to the UK economy every year in taxes, as well as job creation, investment and buying property. The likelihood of further changes, whoever comes to power, will seriously impact the UK’s ultra high net worth (UHNW) community. Britain is the world’s fourth largest country in terms of the size of its UHNW population, with over 11,000 ultra wealthy individuals (those with assets of US$30 million and above) making the UK a base for their business, according to the Wealth-X and UBS World Ultra Wealth Report. As of 2014, they had total assets of over US$1.4 trillion, a rise of 5 percent on the previous year.
Of these, there are an estimated 116,000 high net worth non-doms living in the UK including high profile individuals like Canadian Mark Carney, the Bank of England’s governor, and bank chief executives Antonio Horta-Osorio of Lloyds, Ross McEwan at Royal Bank of Scotland and Stuart Gulliver at HSBC. Although they all pay UK taxes – including income tax, capital gains tax, VAT, and stamp duty land tax – and many of them also pay a levy of between £30,000 and £90,000 per year for the benefit of staying in the UK, they pay nothing on what they earn overseas. It is this calibre of people who may think twice about coming to the UK, or remaining here, said Ian Tait, head of private investment office at London & Capital. “One of the great aspects of the UK is its competitiveness and ability to attract successful people globally. It’s an inconvenient truth but this country needs progressive, forward-thinking people to drive the economy,” he said.
The economy of the UK leans heavily on its finance, banking and investment industry and London’s real estate market, both of which would be impacted by the proposed changes. Abolishing non-dom tax breaks altogether could mean less tax revenue in the long run for the UK, as many taxpayers would leave for more favourable jurisdictions like Switzerland, Hong Kong or Singapore, reckons Piers Master, partner at Charles Russell Speechlys. “If these changes are introduced, then it is certain that the very significant revenues generated by the non-dom levy will be lost.” It is “a gamble” that the people who currently pay the levy will choose to stay in the UK and pay more tax, but there is no guarantee that they will do so.
The problem is, it is not just the non-dom levy at stake, but also higher taxes on property, said John Goodchild, partner and head of private wealth at UK solicitor, Pemberton Greenish. “At the same time as the erosion of non-dom benefits, there have been new tax rules which impact residential property in the UK owned by foreign investors. Each of these changes has had a modest but incremental effect on the attractiveness of the UK to foreign ultra high net worth individuals,” he said.
Hender at Saffrey Champness said he has “already been fielding calls from clients who are concerned about this proposal and want to plan ahead.”
The key question is whether abolition of non-dom status would increase or reduce overall UK tax revenues. Many past governments, both Conservative and Labour, have looked at this question and concluded that it would reduce tax revenues. The danger is this is overlooked in favour of making headlines and swinging voters. In the run up to election, taking aim at the wealthiest individuals is an easy way for Labour to garner the populist vote, pointed out Katie Graves, a partner at Withers’ law firm. “The problem you have is that for the average voter, these things are popular policies and probably go down quite well.”
But there are those who believe that tightening or abolishing the rules will have little effect on the flight of talent and capital.
“The announcement is much more about politics than economics,” reckons Baker Tilly’s senior tax partner George Bull.
He explained that there are around 116,000 people who declare their domicile status because it is relevant to their tax affairs. Around 111,000 of these working in the UK with little or no income overseas will be largely unaffected. There are probably several million people in the UK who might have a legitimate claim to be non-domiciled, but they have no reason to register their domicile status with HMRC because it makes no difference at all to their tax position.
“Those most likely to be impacted are the wealthy business executives and international jetsetters, and the impact of the removal of non-dom status could well result in their companies picking up the bill,” said Bull.
For the remaining jetsetters, they will have to make up their own minds based on their individual circumstances, but the practicalities of upping sticks and moving a family to Switzerland or the Channel Islands should be taken into account.
By Tara Loader Wilkinson