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This week we're going to dig into the impact of the UK's decision to end the non dom residence status. The goal was to close a tax loophole most used by wealthy foreigners, but could the government's plan to generate billions more in taxes annually actually backfire. Welcome to the City.
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Pe so from. There's a new study out by the Center for Economics and Business Research. Its main finding is that the UK's tax overhaul for wealthy foreigners could cost the economy more than it brings in. Can you believe it?
Well, we've already heard of a lot of people actually leaving because of the new rules, and the think tanks argument is that if just one in four of those affected choosers to leave the country, then the reforms to the tax policy would actually flip from a net gain for the Treasury to actually a.
Cost yep and according to the Office for Budget Responsibility, Britain's official fiscal watchdog, around twelve percent of the UK's non doms would leave in response to the government's changes. So obviously that's not yet up at that one in four ratio, but nonetheless it's quite a large number, isn't it.
Yeah, it's large. Now the Treasury is pushing back. It says it doesn't not recognize the figures in this report. But still report brings up some points that a lot of people in the city have been discussing. So in this episode we're going to talk about whether this is a clever tax strategy that levels of playing field, or isn't actually a risky move that could push away the very people who fuel parts of the UK economy. So to discuss all of this, we're joined by Nimeshah, chief
executive officer of Blick Rothenberg. Now, Nimesh works closely with entrepreneurs across a wide range of industries. He advises them on all aspects of their personal and corporate tax affairs, whether they're just starting out, scaling up or planning an exit.
So thanks for joining us, NIMESH. Can you just describe from your vantage point what you are seeing right now in wealthy individuals deciding how to handle this new regime.
The climate on the non domin reforms has changed completely over the last twelve months since the original Tory announcement. There was an initial backlash from I know with individuals about leaving the UK as the original announcements were handled incredibly badly in terms of the shock announcement and the lack of consultation, and then they worry that a future labor government might make those rules even more difficult. Since then, we've seen maybe a tempered down of people actually wanting
to leave the UK. That knee reaction has slowed down slightly, but there is still a direction of wealthy individuals who are at least planning on leaving the UK over the medium term. It may not have been as extreme as people leaving straight away on the fifth of April of this taxi here, but certainly people are making plans on schooling, housing, accommodation work, setting up their businesses abroad so that they can exit the UK over a longer period of time.
So I think maybe some of the stories that we're seeing in the press are slightly blown out proportion around very high profile individuals that are making steps to leave and maybe can feasibly leave more easier because they already have established infrastructure abroad. I think the majority of high net worth individual population is taking a much more measured approach over the medium term to make plans to leave the UK, so we'll see this gradual effect over a period of time.
The story we're looking at this week is this idea that as soon as it gets to be one in four of the UK's non doms leaving the UK, then that is when the policy goes from bringing in money to losing money. Do you think that's a threshold that will ever be reached.
I suppose It's difficult to say where the one in four is actually come from. I imagine there is some sort of science and maths behind those statistics. At the moment, the government is banking on a number of non doms still staying in the UK and actually using the temporary Repatriation facility, which is a twelve or fifteen percent tax
charge to bring historic moneies into the UK. A lot of the revenues actually coming from that, and if you look at the Ober projections, it was about thirty billion that the government were planning to raise over the lifetime
of this parliament. I don't think there will be necessarily a tipping point in this parliament where we see one in four or if it's one in five, whatever the number may be, may lead where it starts costing the government tax revenue, because I think the effects of this is more gradual, giving the gradual pattern of people leaving, and also that hit the Treasury expected to get from the temporary repatriation facility as well.
In the METS what kind of non doms are leaving, So I think overall you have seventy four thousand non doms in the UK. Now, under the previous system, non dams can basically avoid UK taxes on their overseas earnings, but would still pay taxes on domestic income, spending and
any funds brought to the UK. I mean the concern if you're a wealthy businessman and we know there are a lot of them that chose the UK to be their home, but they have billions of dollars of billions of sterliings of investments elsewhere, I mean, it doesn't make it makes zero sense for them to stay in the UK if they're going to be our attacked on those assets.
Yeah, tax was a driver, a incentive for wealthy foreigners to come into the UK, but it wasn't the only consideration. In my experience of working with non arms over the last twenty years, said to someone only today that London is the center of the world. Really has the perfect time zone. It has a solid sort of predictable climate as well. Maybe not the sunshine that we'd expect all the time, but the schooling is great, a long history,
The schooling's great, It's got a history, the tradition. London has a lot of attraction as far as bars, restaurants, theaters, activities have to go. So as a home, London still has a lot of pull, not at least also the safety considerations and the rule of law as well. I'd say tax was maybe the carrot that hooked people in to considering the UK in the first place, but there are lots of other reasons why people would stay here as well.
But again, if I'm a billionaire and I have you know, big businesses in India, if have big businesses in the US and now have to pay taxes on those business so frankly have nothing to do with the UK. Is there any other country that's as punitive for non arms as this new system is.
Well, just to demystifyze some of that as well, if you do have a business with substance operating a different country, it's not necessarily immediate the profits of that business are going to be taxed on you. Now in the New World, there are and have been lots of statutory exemptions reliefs within the UK tax law which does exempt overseas businesses from being taxed in the UK provided they have operations
and substance in those areas. So in some cases, yes, non doms will face additional taxes because of the new regime because of the money that they have accumulated outside of the UK and a generating income on that. But there are other jurisdictions who follow very very similar pattern.
I mean, our closest sort of neighbor around this is the US, where the US actually has more difficult rules for overseas corporations that are operating outside of the US and taxes then being levied on those profits for US
resident persons. But the thing that I suppose the UK needs to be very mindful of which I think the government has maybe underestimated, is a number of jurisdictions are popped up which are offering very very attractive tax incentives and holidays, and maybe the infrastructure isn't there, or maybe the attractiveness of those locations isn't quite there yet, but the tax is definitely turning a lot of heads for people to consider those locations, and I think those will
become even stronger over the next few years as more people start to live in those areas and the infrastructure starts building up around them.
Yeah, I mean before we get onto the rivals and the sort of morsels that they're offering to attract people to leave the UK. In terms of the British regime, my understanding was that for a certain age of very wealthy individuals, it was the inheritance tax policy in particular that was felt to be really something that they couldn't stomach.
Yeah. I think that from my perspective in speaking to my peers in the profession, the inheritance tax was the straw that broke the camel's back. I think there is a real hatred for inheritantis. I mean it's widely reported the inheritance tax is the most hated tax in the UK. And for non doms, they've never had to really think
about inheritance tax. It's something that they would not have been subject to under the Old World and through some sensible planning that they would have done using offshore trusts. They now face the reality of a cliff edge from now this April where they are exposed to inheritsonce tax forty percent on their worldwide assets. There is some limited grandfathering, but it's not as generous as what the original Conservative proposals were suggesting. And so that's the area where non
doms are most concerned. That they've said that actually, I'd built up wealth, large amounts of it when i haven't had anything to do the UK. I've spent a period of time in the UK, and that full wealth now
is exposed to UK inheritance tax at forty percent. And it's that forty percent that is the headline grabber here where people feel that is a big number and that's not something that they're prepared to stomach and there is a real and fairness around being taxed on something that had nothing to do with their UK or their time in the UK. So that's the I suppose the push
factor here for lots of non doms. They're saying, well, i need to get out of the UK system because I'm not going to risk a forty percent hit on something that I just firmly believe should never be assessed to UK and Erison's tax in the first place.
The government they were trying to do two things. They were trying to do something political, so they were trying to signal that, you know, to the Labor Party, to the left of the Labor Party, that they were going to be more egalitarian and redistribute wealth and all of that. They're also trying to make money with a very very straightened budget book. So they're the two things they were
trying to operate for. But equally, I suspect if you can't of got them in a room and ask them truthfully, you know, do they regret some of it or the full extent of the departures we're watching. They might say that they're a bit worried because what has become more and more clear is that growth is what they need.
By the next election, they need to show that the UK economy is growing and if you lose too many wealthy people, absolutely take your point that it is not yet at that kind of tipping point number that the report suggests, but if you lose too many people, that is trickier. Yeah.
I think it would be remiss of the government and the Rachel Reason's team to acknowledge that this isn't concerning the stories and the plans that certainly individuals are making over the next few years, and how that then impacts the growth of gender. I think what we've also not talked about is the number of foreigners wealthy individuals are now not coming to the UK as well, which is very difficult for anyone really to measure and capture. If I suppose I've had my time, I suppose and go back.
I think the government did a poor job at executing this, and that goes right back from the Conservative government when they announced the proposals as a phata con plea. There's no consultation period. They didn't engage with the professional community like myself on the design of these proposals. They were done, and the lip service I suppose the profession received afterwards
also left a sour taste. And then I think Labour coming out and saying we're going to make these wolves worse again, that sent a lot of uncertainty into the international community around this. I think there is still an opportunity for the government, which not any government will probably ever do, but to hold their hands up and say we got this wrong, but we've got this wrong as well,
not only on non doms. We've got it wrong on inheritance taxes, the farmers, the family businesses, the pension funds. There's a number of areas of change that the government have made on taxes as a package which has signposted and pushed non doms out of the UK. I think they could come back to the table and engage with certainly the non community and say we think we got
this wrong. We can change this, and we can come up with a new system or an enhancement of currently of what we have, which could be a longer period than the four years that we've got right now to ten years to mirror kind of what some of the
competitor jurisdictions are doing. And also we want to be able to find a way in which we can cushion some of the inheritance tax friction that we're seeing, which coupled with a fee that's been talked about a lot and some lobbying groups have proposed a tiered tax system where you would pay an annual fee based on the level of wealth that you have, which would protect you then from not only your income engagement, more importantly the inheritance tax regime, and also then balance the books by
saying to the public that actually we need wealthy investment into the UK. The UK is an island and has been built on immigration investment here for a long time. Here's a means to be able to get more revenue from this population, balance the books, more money going into the public services which were desperately but also it supplements our growth agenda with more private investment into our businesses and infrastructure.
No match. How many millionaires do you think the UK has lasted so far? So there were reports to saying that it was about eleven twenty twenty four. And if there is a change in tax regime inheritance taxation, do they come back? I mean it's very difficult to kind of pack up your family and come back to the UK. So is there long term damage done no matter what happens in the next couple of quarters.
Yeah, I think it's important to say there is probably a bit of sensitivity in that eleven thousand number that is based on a projection, an estimate. It's probably the only bit of research that probably exists out there is the reality eleven thousand. I don't think anyone's captured that data yet. Hopefully we'll see some official Treasury data come
out over the next few years. But what I am seeing is two schools have thought here really from non doms, which is one those that are prepared to ride it out for the next four or five years during the lifetime of this government because they feel that this government won't last a second term, and say, actually, I'm prepared to take the tax exposure in that period of time.
Maybe they're in a fortunate position where they're not quite at the ten year juncture, so they're not fully exposed to inheritance tax yere, so they've got a bit more time in the hands. The other camp, we're saying, actually, I'm gone, I need to get out of the system before inheritance tax does come to bite me. But I'm keeping a very watching eye on what will happen around potential changes if we do have, say, a reform government.
I'm going to say it might not necessarily get better for them.
Well, it may not because of a slightly different political agenda if it is a reform government in the future, but depending on where the direction goes politically. And I think that's really important that some are saying, well, this is a short term move for me out of the UK, because I actually want to go and live in London. I want to live in the UK for all the reasons that we've talked about, and so in the world where it is a bit more feasible to be more
transient and be more mobile and work abroad. It's inconvenient where you've got young families and maybe certain business operations here. But I think people are prepared to take a five year view and then in the hope that in five years time it will change. But I suppose the warning shot there is that's an optimistic view. It's very difficult for any government, new or old to then say, well,
there's a tax revenue that's coming in. How do I square the circle by potentially a giveaway both politically and financially in order to make this work. And so the government it's like a drug. I suppose when you raise taxes, it's very difficult to get off that drug. And I think that's the difficulty that we'll find in the future. So for some people, as I say, are in holding pattern and hopeful that things will improve over the next five years.
I wonder whether for a lot of these countries, including Italy, which has got a very beneficial regime for them, but even so, you know, they have the same constraints on an aging population, needing more money, needing more taxation. Clearly they've made a decision that they want to entice the billionaires and millionaires rather than you know, tax them at
the level that we are. But nonetheless, lots of nations are facing the same pressures, demographic pressures and fiscal pressures, which is why they're starting to look at non doms. And I suppose if you're a non doom you're thinking, well, actually, my room for maneuver over the next few years is reducing.
Yeah, places like Italy clearly have made a strategic decision that this is where they're going to place their chips by creating this very attractive tax and immigration regime to go and entice wealthy foreigners into Italy. Now, what I suppose I'm encouraged by when I look at governments like Italy is that they've made a strategic decision. It doesn't feel like there is a strategy with our government at
the moment around what they actually want to do. It's based on lots of reaction and ideology unfortunately at this stage. So I'm unclear as someone who's been working in tax for the last twenty years as to what this government is trying to achieve over a long term period and how they're going to get there. There doesn't seem to
really be a plan. What I would say like to see from the government is to come out and put their flag in the ground and say, strategically, this is what we're aiming for, and these are the policies, whether they're uncomfortable politically or not, but this is how we
go and achieve those plans. Difficult decisions do need to be made, which may not make you a popular government, especially with your core demographic of voters who perceive non doms and the wealthy in some way to be a root cause of some of the problems that the country's facing. But we have seen other countries have made it work. Italy now for the best part of ten years, this
regime has survived. It's changed slightly. They've doubled the fee, possibly in reaction to the fact that there's more demand of people who wanting to come there. But I think we have lost our way on understanding actually the behavioral response of non doms, where it's a much easier now to go and find a new home very quickly because there are other countries that are looking to buy in that wealth and the benefits of that wealth that can be generated locally.
Nimesh, thank you so much for joining us.
Thank you.
Thanks for listening to this episode of In the City from Bloomberg. This episode was hosted by me Alecra Stratton and Francine Laqua. It was produced by Someasadi Moses and Am and Tala Armadi. Brendan Francis Newnham is our executive producer and special thanks to Nimesh Shah. Please subscribe, rate, and review wherever you listen to podcasts.