Why UK “non-dom” wealth exodus concerns may be overstated: Matthew Brooker

The UK's decision to abolish the non-dom regime has sparked concern, with tax experts warning of a possible exodus of the wealthy. The abolition could cost the country nearly £1 billion in lost revenue, contradicting earlier predictions. However, the extent of the impact remains unclear, with only a small percentage of non-doms expected to leave. The move raises questions about fairness and the future of UK tax policy, especially for ultra-high net worth individuals..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..By Matthew Brooker.The drumbeat of anxiety over the UK's plans to abolish its "non-dom" regime is growing, .___STEADY_PAYWALL___.survey.People who live in the UK but who can plausibly claim somewhere else is their permanent home, or domicile, may opt for a special tax treatment known as the "remittance basis," which exempts them from paying anything on foreign income or capital gains unless these are brought into the country. Until now, non-domiciled individuals have also been exempt from inheritance tax on their overseas wealth, whereas UK-domiciled residents are liable to pay a rate of 40% (after allowances) on their worldwide assets. .It's a system that confers significant tax benefits, which become more lucrative the wealthier you are. It's also an anachronism that should have been scrapped long ago. The origins of the non-dom regime stretch back to 1799, when Prime Minister William Pitt the Younger imposed the first income tax to finance the Napoleonic Wars. It was intended as a deferral for colonial plantation owners, who would be taxed on the income from sugar, tobacco and cotton shipments only when they received the funds. That evolved later into an exemption..The system is riddled with absurdities. To begin with, domicile is an oddly complex and subjective way to determine tax status. Being a non-dom rests on the assertion that your ultimate home is in another country and you intend to return there. There's a Schrodinger's cat quality to this — a quasi-permanent route to temporary status. You could live almost indefinitely in Britain at one time while remaining a non-dom, as long as your intention was to leave one day (and who is to know your true intentions, apart from you?). Basing the test on an objective standard such as years of residency — as is now happening — makes far more sense. .Read more: Speedy SA bricklayers, who triple British output, now in high demand in the UK – Saskia Johnston Sable International.Governments of both main parties have been chipping away at the non-dom edifice for some time, most notably in 2017 when the then-Conservative administration imposed a 15-year limit on claiming the status. With the Labour Party pledging to abolish the regime if it won July's election, Rishi Sunak's government preempted the opposition by announcing an end to the system in March. Labour then went further by promising to ditch the inheritance tax exemption, which the Tories had retained..There are reasons to treat the ensuing outcry with a measure of skepticism. Nobody likes to pay more tax, so there's an incentive to speak out — especially if there's a chance of influencing public policy. It also costs nobody anything to say that they are "considering" or "planning" to emigrate because of the non-dom changes. Actually doing so may not be so simple. Moreover, there's an industry of tax consultants, lawyers and other professionals who stand to lose out with the system's demise..Clearly, some people will leave (or have already, following the March announcement). How many will depart is an open question. What is perhaps more important is who will go, though..This is a high-value cohort. There are about 25,000 to 30,000 using the remittance basis each year (excluding those with low unremitted income of less than £2,000 annually), researchers led by Arun Advani of Warwick University estimated in a study last year that used HM Revenue & Customs data. The group has average UK income and gains of £370,000, and estimated offshore income returns of £420,000. Among them, 86% are in the top 1% and 29% are in the top 0.1% of the UK income distribution. More than one in five top-earning bankers is a non-dom. They make up a large proportion of other finance and City of London-type jobs such as consulting and law..Anyone earning £370,000 in UK income is already paying the 45% top income tax rate. Will withdrawing the foreign exemption be enough to make them leave? Non-doms are already a mobile population, given their prior connection with at least one other country. Other factors are likely to weigh, however: career stage; overseas job prospects; size of foreign assets; family and schools situation; lifestyle preferences (not everyone wants to live in the Middle East, whatever the tax rate). No one can know for sure, but Advani and his colleagues projected that only 0.3% of those affected would quit the UK and that scrapping the non-dom rules would raise more than £3 billion in tax revenue — a finding Labour cited in outlining its policy. There's no comparable academic rigor underlying predictions of a bigger exodus..Read more: 🔒 Billionaire Paul Marshall buys Spectator, boosts Tory influence on UK media.That estimate was based on the response to the 2017 reform, which the researchers said caused only 0.2% of non-doms to leave. The big difference this time is the withdrawal of the inheritance tax exemption. It's easy to see how this could be a deal-breaker for ultra-high net worth individuals with substantial overseas wealth: Zero to 40% is quite a leap, even with a 10-year grace period..Here, though, it's important to note that not all non-doms are created equal from a UK revenue perspective. The regime is particularly advantageous for super-rich individuals who don't need to work and can live off a supply of "clean capital" held in segregated overseas accounts, which can be remitted to the UK tax-free. These are the non-doms most likely to leave — but they also have the least value to the country, since they pay zero tax and are essentially free-riding on the UK's public goods..The counterargument is that these persons support the economy through their spending and investments, and forcing them out will have adverse ripple effects. Yacht brokers, Rolls-Royce showrooms and Swiss watch sellers may suffer. It's worth remembering that efforts to taxwealth have generally had a poor record. The number of OECD countries levying wealth taxes dropped to four in 2017 from 12 in 1990. France's caused an estimated outflow of more than 60,000 millionaires before being repealed in 2017..There's also a wider signaling effect to consider. Driving out the super-rich would risk giving the impression that the UK has become hostile to wealth accumulation, chilling foreign investment and entrepreneurship — an unhelpful message for a Labour government that says its priority is economic growth. But if the objective of the non-dom rules is to attract investment, then they clearly don't do that. By exempting foreign but not domestic assets, they are a disincentive to invest in the UK — another absurdity of the current system. There has to be a more rational approach..The full details of Labour's non-dom changes aren't yet known, and uncertainty has surely fed the concerns. The party has cited fairness as its primary reason for scrapping the system — but this is a government that is also hungry for revenue to rebuild public services, with plans to direct the extra tax raised to the National Health Service and schools. A larger-than-anticipated negative response would undermine the government's reputation for economic competence. That argues for mitigating the risks by perhaps softening the inheritance tax measures — for example, by stepping up the rate gradually, to 10% in year 10, 15% in year 11, 20% in year 12 and so on, as Advani suggested to me..Read also:.🔒 FT: PwC to parachute in UK partner to run scandal-hit China business🔒 UK Tories in crisis as populists surge and labour declines: Martin Ivens🔒 UK tech mogul Mike Lynch among those missing after storm sinks yacht off Sicily.© 2024 Bloomberg L.P.

Why UK “non-dom” wealth exodus concerns may be overstated: Matthew Brooker

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