The truth of the non-dom matter
Fairness has nothing to do with it. The UK has to give competitive incentives to non-doms if it wants to benefit from their investment
The global opportunities for mobile high-net-worth-individuals (HNWI) are constantly evolving. The decision to relocate to a new country takes into account a number of factors and it is never a decision taken lightly, even by the world's super rich.
The UK has been a net beneficiary of the movement of mobile HNWs over the past decade, having had the largest influx in the world as a percentage of total HWNI population. According to Knight Frank's 2015 Wealth Report, in terms of population alone, London remains the single biggest centre for global UHNWIs, followed by Tokyo, Singapore and New York.
This is unlikely to come as a surprise to many Londoners. Our newspapers refer to London as 'Moscow-on-Thames' and in 2012, we were reliably informed that London had became 'France's sixth biggest city'. In truth, the UK and London in particular, has become a popular destination for people of all nationalities. Is this a trend that is sustainable?
Many of our clients moving to the UK point to the quality of private schools, the strong financial sector, the housing market and other lifestyle factors such as a temperate climate. Not least, the UK is viewed as a safe pair of hands for business, with a stable legal system and solid infrastructure to match. However, tax is also, undeniably, an important part of the picture. The advantages of non dom status have been well publicised, even if the complexities of the legislation have not.
This article considers some of the key 'push and pull' factors for mobile HNWIs.
The UK tax climate
A number of rule changes are due to come into effect for non-doms in April 2017. One of the principle benefits of non-dom status is the ability for an individual to be taxed on the so called 'remittance basis' whilst they are UK resident. UK resident non-doms are taxed on their UK income and gains in the same way as UK domiciliaries. But if they use the remittance basis they are only taxed on their foreign income and gains if, and to the extent that, they are remitted to the UK.
In the past, this favourable treatment has been available to non-doms indefinitely, albeit with annual remittance basis charges applying since April 2008 to taxpayers who have been UK resident in seven out of the previous nine tax years.
However, from April 2017, non-dom taxpayers will lose the ability to use the remittance basis once they have been UK resident for, broadly, 16 tax years or more. They will also be treated as being UK domiciled for inheritance tax once they reach their 16th tax year of UK residence.
Currently there is uncertainty about how offshore trusts will be taxed from April 2017 onwards. It appears that non-UK sources of income and gains retained within offshore trusts will escape UK tax. In addition, from April 2017, UK residential property will be subject to inheritance tax regardless of how it is owned.
This is all sending a clear message: we want you to come here, and there are incentives in the medium-term, but if you stay longer than 15 years you may be taxed in the same way as everyone else unless you take tax advice.
This is just a snapshot of the UK tax landscape for non-doms. According to our clients, it is not necessarily the substance of the rule changes that can cause non doms to shy away from the UK, it is how those changes are presented by the government that matters. Uncertainty about the future of the UK's tax regime for non-doms can be more off-putting than anything else.
Visas
For wealthy non-doms, the UK's Tier 1 (Investor) Visa has been a popular route to securing residency in the UK. In some cases, it is seen as part of a longer-term plan to achieve UK citizenship after 5 years.
However it is not a cheap option and the requirements are beyond the reach of many non-doms. Prior to November 2014, an investment in the UK of £1m was required. Applicants now need access to £2m which they are willing to bring to the UK. In practice, there are strict rules on how the money can be invested (cash and property are now excluded).
It is perhaps no coincidence that Tier 1 (Entrepreneur) Visas have become increasingly popular. This is the visa category for foreign nationals seeking to set up a business in the UK with a minimum investment of £200,000. There is a 'genuineness' test to eliminate applicants without real entrepreneurial motives. Applicants must also provide a business plan. The business also needs to employ two members of staff for at least 12 months within three years, ensuring that there is an emphasis on job creation.
What's on offer elsewhere?
If the UK is to continue to attract inflows of human and financial capital from overseas, then the government needs to be mindful of wider trends and how 'competitive' the UK is in an international setting. It seems to be a common misconception that the UK is somehow alone in using a benign tax regime to vie for inflows of wealthy and talented individuals from overseas.
Portugal
Portugal is a good example. Provided that an individual has not been resident in Portugal in the previous five years, they can relocate to Portugal and benefit from non-habitual resident (NHR) status for up to 10 years.
Under the NHR regime, a tax exemption is offered for foreign income. Obviously it will depend on the individual's particular circumstances, but on the face of it, this has to be an interesting proposition for mobile HNWIs, as arguably this may be better than the UK's remittance basis.
Portugal also offers an attractive 'golden visa' programme. The visa requires a lower investment commitment than the UK. For example, one possibility is the acquisition of Portuguese real estate with a value of at least €500,000. That alone is sufficient to qualify for the golden visa. In comparison, the acquisition of UK real property no longer counts towards the UK's Tier 1 (Investor) Visa investment requirements.
The UK has historically attracted a significant number of Tier 1 (Investor) Visa applicants from China. Therefore, it is interesting to note that almost 80 per cent of the 1,936 visas issued by Portugal in the first 12 months of its golden visa programme were obtained by Chinese applicants.
Cyprus
Mobile HNWIs also view Cyprus as an interesting proposition within the EU. Cyprus offers a citizenship by investment scheme, whereby an investment of at least €5m in state bonds, fixed term deposits or a Cypriot company is needed.
Alternatively, the applicant can invest €5m in real estate projects. However, a lower investment requirement of €2.5m is available for applicants investing via a 'collective' of at least five other investors.
The applicant also needs to own a permanent residence in Cyprus, with a market value of at least €500,000; this real estate investment counts towards the €2.5 million.
Cypriot resident non-doms enjoy a zero tax rate on interest, dividends and most capital gains, regardless of whether the source is domestic or foreign. There are also no wealth or inheritance taxes in Cyprus.
Malta
Malta also has a residence and visa permit programme requiring a €30,000 payment to the Maltese government, plus a minimum investment of €250,000 in Malta. There is also a requirement to purchase Maltese property for a minimum value of €320,000, or the rental of a Maltese property for a minimum of €12,000 per annum. These investments must be maintained for a minimum period of five years.
However, in return, successful applicants are taxed under Malta's very own version of the remittance basis. This is actually more forgiving than the UK's remittance basis, as non Maltese capital gains can be remitted to Malta tax-free.
St Kitts & Nevis
Those seeking paradise in the Caribbean can acquire citizenship in St Kitts & Nevis by making a minimum investment of US$400,000 per main applicant. St Kitts & Nevis passport holders enjoy full Schengen zone privileges (free movement to 26 European countries) and do not require a visa to visit the UK.
Residents are also subject to a benign tax regime; with no income tax, capital gains tax or inheritance tax. No taxes are levied on assets or income originating from outside St Kitts & Nevis.
Conclusions
Clearly not every jurisdiction will be appropriate or desirable for all clients. However, it does illustrate the point that the UK government will need to think carefully about future changes to the tax regime for non-doms. Visa requirements will also have to be looked at if the trend of attracting mobile HNWIs is to be maintained. There are a whole host of neighbouring countries in Europe and beyond that are poised to welcome HNWIs leaving the UK.
The UK should not be complacent. As Thomas Jefferson put it: 'There is nothing more unequal than the equal treatment of unequal people'. We should acknowledge that mobile HNWIs are, in fact, different from the rest of us.
While it may seem unfair to have favourable tax rules for non-doms, or visa programmes reserved for wealthy foreign investors, if the UK wants to reap the benefits of these people being in the UK and spending their capital here, it needs to ensure that its tax and immigration policies are not only welcoming, but more welcoming than those offered by other countries once all other factors are taken into account.
Mark Davies a managing director of Mark Davies & Associates