A House of Lords reception last Monday provided the government with a perfect opportunity to read the room on its non-dom reforms.
But it’s hard to read the room when you’re not in it.
Sponsored by Conservative peer Baroness Mobarik on behalf of Foreign Investors for Britain, the evening event drew cross-party MPs and peers, alongside senior business leaders including Sir Martin Sorrell.
Regrettably, despite having been invited, government advisers and officials were largely absent.
KEY MESSAGES
Had they attended, they would have heard two key messages:
- The new rules need tweaking.
- A flat-tax, similar to the one used in Italy, could ease pressure on government finances while attracting overseas investment.
Under the previous regime, non-doms could live in this country without paying UK tax on their overseas wealth. The new rules impose a residence-based framework with a four-year time limit and a proposal to charge inheritance tax (IHT) on global assets.
As a result, wealthy investors have already begun to leave the UK, depriving the government of capital gains tax revenue.
There is also evidence that a number of UK company directors are moving abroad and Knight Frank recently calculated the government has lost more than £400 million in stamp duty revenue due to subdued activity in high-value property markets.
REAL-WORLD CONSEQUENCES
It’s hard to imagine the government planned this, and the non-dom changes were actually set in motion by the previous Conservative administration, but such real-world consequences are difficult to ignore.
“Migration is assumed to be a significant behavioural response for non-domiciled taxpayers,” the Office for Budget Responsibility (OBR) said in a report this month that set out its assumptions for the UK economy. It was a marked shift in tone from the more circumspect language used in previous reports.
Ignoring what the room is saying will become increasingly difficult for the government, especially when its financial headroom is so tight. It may explain recent media stories alluding to a possible re-think around IHT.
James Quarmby, a partner in the private wealth team at law firm Stephenson Harwood, believes the government may tweak the IHT rules to make them more generous.
The balancing act, he says, is to encourage inward investment while not doing “anything that will look like tax cuts for millionaires.”
Proposals for a Wealth Tax face similar real-world hurdles. Although, reports suggest the government appreciates such a tax would also trigger a “behavioural response”, to use the OBR’s euphemism.
UNHELPFUL AMBIGUITY
For now, as the government tries to placate all sides of the Labour Party, its tone is understandably non-committal on such matters.
Unfortunately, this kind of ambiguity doesn’t help anyone wanting to make a major financial commitment over the next few months.
Such uncertainty meant there were 12% fewer transactions in the first half of this year in prime central London compared to the five-year average, Knight Frank data shows.
That compares to an increase of 8% in south-west London, where demand is more domestic and needs-driven.
After a summer of ministers refusing to rule particular policies in or out, expect more concrete plans during the party conference season, which runs for a month from early September.
After being outflanked by Reform and its plan for a Britannia Card to attract overseas investors with a one-off fee of £250,000, the Conservative Party will no doubt unveil its own plans.
In a letter to the Times on the same day as last week’s House of Lords event, Conservative Peer Baroness Mobarik outlined the merits of a flat tax.
“This model, which would generate large revenues and a variant form of which is already used elsewhere in Europe, is politically viable and fiscally sound.
“It would be a win-win for the UK and public service funding and for entrepreneurs who proudly call the UK their home,” she wrote.
While some non doms have already left, others are waiting to see how the next few months unfold, said Leslie MacLeod-Miller, chief executive of Foreign Investors for Britain.
“Before the election, the government said it wanted to partner with the private sector,” he told Knight Frank. “Well, to paraphrase Eliza Doolittle, don’t tell me you love me, show me.”
