UK Chancellor Rachel Reeves delivered "severe fiscal and economic dangers" with her reforms for the non-dom tax regime in her recent budget, research by Oxford Economics has found.
Commissioned by advisory group Foreign Investors for Britain (FIFB), the report calculates the changes to the non-dom tax regime, especially those relating to inheritance tax on worldwide assets, will actually result in a £900 million ($1.13 billion) cost to the UK Exchequer and not, as the Office for Budgetary Responsibility has predicted, a gain of £3 billion. The report was based on a survey of 115 current foreign investors and 42 specialist tax advisers who represent 614 "non-dom" clients.
“The Autumn Budget 2024 offered the UK government the opportunity to pause its proposed non-dom reform and to reflect upon the evidence-base that Foreign Investors for Britain has been steadily contributing," said Leslie MacLeod-Miller, chief executive of Foreign Investors for Britain. "FIFB supports a fairer system of taxation and our solution means that foreign entrepreneurs and investors would actually pay more but without a change of approach this internationally mobile group will leave and take their money with them.
"Sadly the government did not act upon the behavioural and economic conclusions of a vast number of foreign investors and their advisers. Neither HM Treasury nor the Office of Budget Responsibility have fully engaged with the data we have provided – or the offer to work in partnership to model further data – particularly around the Tiered Tax Regime, and so a large number of non-doms are not just heading to the airport, the planes are leaving the runway, heading to more tax efficient destinations such as Switzerland, Portugal, Dubai, Malta and others."
The Tiered Tax Regime (TTR) is a scheme put forward by FIFB as an alternative to Ms Reeves's plan to scrap the non-dom tax status in favour of a residency-based system. FIFB believes the contributions that non-doms make as investors in the UK economy is seriously underestimated, as is the amount they pay in tax through VAT and various other levies. On average, respondents to the Oxford Economics survey paid £800,000 in UK VAT in the 2023/24 tax year and £890,000 in stamp duty over the past five years.
Under the TTR, non-doms would pay an annual charge based on their net wealth but their non-UK assets would be protected from inheritance tax. In addition, their foreign income and gains would be exempt, as well as any UK investments for up to 15 years, while their UK earnings would be subject to taxation.
'Net fiscal gain'
The proposed annual charge would increase from £200,000 for those with wealth under £100 million to £500,000 for those with wealth between £100 million and £250 million, to £1 million for those between £250 million and £500 million, and £2 million for those with wealth over £500 million.
“Our analysis shows that under the TTR, the UK could see a substantial increase in attracting high-net-worth international entrepreneurs, investors and workers," said Alex Stewart, associate director at Oxford Economics. "It is highly likely that the TTR would provide a net fiscal gain while safeguarding the UK’s position as a desirable destination for global talent and investment.”
The TTR, Oxford Economics said, could potentially create a £680 million fiscal benefit for the UK, and boost the number of high-net-worth foreign investors living in Britain by 61 per cent over the next five years. Meanwhile, 62 per cent of the respondents in the survey indicated they would or were actively considering leaving the UK shortly as the Treasury's tax plans stand at the moment, compared to only 5 per cent if the TTR was to be introduced by next April.
Oxford Economics and FIFB contend the survey indicates that not only would the TTR system mean wealthy foreign investors would delay or reconsider their emigration plans from the UK, but would also attract new investment. “Foreign investors and entrepreneurs are particularly sensitive to IHT [inheritance tax] on foreign assets, a concern which the proposed TTR would address," said Dominic Lawrance, partner at the legal firm Charles Russell Speechlys.
"The TTR proposal offers the clarity and certainty that would encourage these individuals into the UK, so that they can contribute to the UK economy and indeed to its society. With the TTR, the UK has an opportunity to create a welcoming tax regime for foreign investors and entrepreneurs, which would at the same time generate very meaningful tax revenues from them."
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