Foreign investors in the UK, including ultra-wealthy non-domiciled individuals, are advocating for an Italian-style flat-tax regime to prevent a significant outflow of wealth from the country.
With the government’s budget set to address the contentious non-dom tax status, lobby groups such as Foreign Investors for Britain (FIFB) and Oxford Economics have proposed a tiered tax system aimed at retaining affluent non-doms, CNBC reported.
This proposal emerges amid increasing pressure from the Labour Party to abolish the non-dom status entirely, which could have profound implications for the UK economy.
Proposed tiered tax regime to retain foreign wealth in Britain
The lobby group FIFB, in conjunction with the think tank Oxford Economics, has outlined a new tax framework designed to keep wealthy non-doms in the UK.
Under this proposal, individuals would pay an annual fee based on their net wealth, allowing their foreign earnings and non-UK assets to remain exempt from UK taxation.
Specifically, individuals with a net worth of up to £100 million would pay an annual fee of £200,000, while those worth over £500 million would pay £2 million annually.
This tiered approach contrasts with Italy’s flat-rate tax, which charges all non-doms a standard annual fee of €200,000.
This new system aims to provide stability for non-doms, who are increasingly considering leaving the UK due to government discussions about scrapping their tax advantages.
The proposal seeks to balance the need to retain wealth in Britain while generating substantial tax revenue.
UK non-dom status at risk in the upcoming budget
The UK’s non-dom status, a tax rule that dates back to colonial times, permits individuals domiciled abroad but residing in the UK to avoid paying tax on their overseas income and gains for up to 15 years.
As of 2023, an estimated 74,000 non-doms reside in the UK, a rise from 68,900 in 2022.
While the regime has long been politically contentious, it faces renewed criticism from the Labour Party, which has pledged to abolish it and curb the use of trusts to shelter overseas assets.
Chancellor Rachel Reeves is expected to address the future of the non-dom regime in the budget set for October 30.
With the public finance funding gap now reported to be £40 billion, compared to previous estimates of £22 billion, tax increases are anticipated.
The Labour Party contends that abolishing the non-dom system could yield an additional £2.6 billion during the next government term.
However, some experts warn this could lead to capital flight from the UK, costing the Treasury in the long term.
According to research by Oxford Economics, the UK risks losing substantial investments if the non-dom status is abolished.
Their survey reveals that 72 non-doms have collectively invested nearly £8.5 billion into the UK economy.
Some non-doms have already begun moving their wealth; Oxford Economics estimates that £842.2 million has been divested in anticipation of potential changes.
The survey also indicates that if the proposed tiered tax regime were implemented, only 13% of non-doms would still consider leaving the UK.
Conversely, nearly all respondents (98%) indicated they would likely relocate their wealth elsewhere if the tiered system is not introduced, with attractive alternatives including Italy, Switzerland, and Dubai.
Labour rethinks non-dom crackdown amid business concerns
The Labour Party’s stance on the non-dom issue has evolved recently, with Chancellor Rachel Reeves reportedly reconsidering elements of the proposed crackdown.
While addressing tax fairness has become a key component of the party’s manifesto, it now seems to be softening its position in response to concerns from business leaders about driving wealth creators out of the UK.
During the Labour Party’s first International Investment Summit, Prime Minister Keir Starmer sought to reassure investors by promoting the UK as a destination for growth and wealth creation.
While the UK’s non-dom regime has historically attracted foreign investment, the ongoing debate regarding its abolition has raised concerns about Britain’s competitive ability.
As the UK government prepares to make critical decisions regarding its tax policies, the outcomes of these discussions could have a lasting impact on Britain’s economic landscape.
The introduction of a tiered tax regime may present a compromise that keeps wealthy non-doms in the UK while addressing concerns about equity in the tax system.
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