Rachel Reeves and the wealth exodus

Many years ago I was invited to take part in a live debate on BBC TV on the personal taxation of wealthy UK residents in front of an audience of about 50 people in Glasgow. Before the start of the program, the presenter seemed friendly and keen to make us relax, but as soon as the program began, his demeanour changed. He started with an attack - why should wealthy foreign people be given tax breaks such as in the non-dom tax regime?

Foreign wealthy people, I said, have choices, and the taxation of their wealth affects their decisions. 

A woman in the audience said that these people lived in the UK because it was a great place to be. They would live in the UK regardless of how much tax they paid. 

I mentioned the Laffer curve. This is a bell-shaped curve drawn by Arthur Laffer on a napkin to explain the relationship between the rates of taxation and the amount of tax collected. It starts at 0% where, of course, no tax is collected and goes up to 100% which again shows that no tax is collected because no one would do anything for a zero rate of return. His point was that raising the rate of tax does not neceassarily increase the amount of tax collected. Laffer argued that there is a point at which raising the rate of tax reduces the amount of revenue  raised. This is the point at which the maximun amount of tax can be collected.

Rachel Reeves has now exceeded this point and as a result wealthy individuals are leaving the UK. Once they are non UK resident the UK Government gets no tax at all - a marked decrease in revenue. 

Simply reinstating the inheritance tax benefits for wealthy people will not be enough to stem the exodus.

Once trust is lost, which Rachel Reeves has succeeded in doing despite her intention to build a business economy, the wealthy and their businesses will leave. She needs to rethink what she can do to attract these people back into the country to live and work here.

The tax benefits for non-doms were not designed to attract wealthy people into the country they came about by accident. Before travel became ,easy with trains and planes UK residents were taxed on the remittance basis, which meant that monies made abroad were only taxed when they were brought into the country. This was deliberate to encourage people to travel which was risky then and make money abroad.

However, after the World Wars the Government needed to pay for the cost and damage.

 It needed to raise taxes. Changes were made to tax all people who were born to a father who treated the UK as his home country, a UK domiciled person, on all monies whether made in the UK or abroad in the UK as they arose. This was called the ‘arising’ basis of taxation but it left the non- UK-domiciled people who lived in the UK on the old ‘remitance’ basis of taxation.

The definition of domicile was already used to link a person to the succession laws of a country. For example, if you were born to a father who treated France as his home country at the time of your birth, French succession laws would apply to your estate on death even if you lived in the UK. This means that you would be subject to the French ‘Forced Heirship’ regime where you have little freedome of disposition and must give most of your estate equally to each child, unlike if you were ‘domiciled’ in the UK in which case, you can give your entire estate to just one child, such as the eldest boy and leave your other children nothing.

By charging UK domiciled people to worldwide tax as it arose, left those people who were non-UK domiciled but UK resident subject to tax only on their wealth, which was made in the UK or brought into the UK.

This led to easy tax planning. Simply, keeping your wealth out of the country and bringing in only what you needed to live on which was neither income or capital gain was tax free. In the early days of my career as a tax lawyer this planning was my bread and butter. Soon, banks and other financial institutions popped up in the Channel Islands and in Switzerland to take advantage of this new wave of non-dom tax planning. 

I have always thought that it is perverse for non-doms to keep their wealth outside the country whereas Switzerland encourages wealthy people and their wealth into the country and they agree what tax they will pay to Switzerland. I would like to see a change in the law so that tax benefits only apply to wealth which is managed into  in the UK either directly or in UK based trusts. 

And now a word about those non-doms who have homes in the UK. I have seen articles  recently about people choosing to rent out their properties ‘to keep their options open’ so they could return to the UK once the old laws are reintroduced.

These foreigners are not selling their properties not because they want to keep their options open but because there are no buyers.

Stamp duty land tax (SDLT) for foreign buyers is now a whopping 19% for foreigners who do not live in the country. This is a rate which is counter productive - it puts off foreign buyers and stagnates the market.. It does not just impact the number of people living in the UK, but also the estate agents, interior designers, upholsterers, painters and decorators, architects, plumbers, painters and so-on. Without an active market all ancillary services suffer and with it significant tax is lost to the Treasury.

SDLT needs to be radically reduced to the point at which people are prepared to buy UK properties and tax collection increases.

There is a lot to be said about not allowing politicians to influence tax rates and exemptions. Although there may be critics of Arthur Laffer, we are certainly now seeing the effect of high tax rates on behaviour - and an exodus of wealthy people leaving the UK - and once gone they won’t come back other than for a holiday and everyone will be the worse off for it