High-Net-Worth Individuals Leaving UK
Ordinarily, you wouldn’t expect to see companies and investors flow from a low-tax jurisdiction to a high-tax one (although, in the complex world of international finance, it often does in a roundabout kind of way). But sometimes, water can be seen flowing uphill too. In this case, from the United Kingdom to Italy.
The UK isn’t exactly a low-tax jurisdiction. But when compared with Italy, it’s a fiscal paradise. In the World Bank’s ease of doing business index, the UK is positioned 7th out of 190 jurisdictions, with Italy trailing in 46th. Narrowing the comparison down to just tax, and the gap gets significantly wider: the UK is 10th, and Italy is down at 112th. So not exactly the most logical move for a business or investor.
Yet, according to a senior official in the Italian finance ministry, those from the UK were represented among the 150 wealthy people who decided to take up residence in Italy in the past year. But don’t worry, there is method behind the madness. This is all because of a new tax scheme designed to lure exactly the type of people – potential investors – who have shunned Italy’s high and complex taxes in the past.
Several other nationalities were among the first-year take up of the new Italian flat tax scheme, including Americans, Russians, Dutch, Norwegians, and Swiss. So the UK was far from alone, and in relative terms, the number moving to Italy so far is small. However, the UK’s case is of particular interest, because it would appear to support the view that the UK’s attractiveness to the global entrepreneurial class is fading.
Research by New World Wealth published in January found that there was a net outflow of 4,000 high-net-worth individuals from the UK in 2017 alone. In absolute terms, in a country of 65 million people, that’s a tiny proportion. But considering that a similar number of US passport holders – about 4,500 – left America (population 326 million) permanently last year, perhaps the UK does have something of a HNWI exodus on its hands.
Many reasons for this have been given, some tax-related. An important factor, perhaps, is the ongoing erosion of the “non-dom” rules. This archaic principle of UK law allows a select group of largely wealthy foreign individuals to be resident in the UK, but not domiciled there (i.e. retaining strong links with their country of origin) and traditionally this has meant that they do not have to pay tax on foreign income as long as it stays offshore. Unsurprisingly, given the public’s current mood when it comes to the issue of tax, the non-dom regime has become harder for the Government to justify, even though it is suggested that non-doms have a net benefit for the UK economy overall. Hence, successive administrations have legislated to make the non-dom system steadily less attractive.
In addition to continued uncertainty about the UK’s residency and tax rules, property taxes have increased markedly on high-value real estate purchases in recent years. These measures are probably designed more to take the heat out of London’s sky-high property market, more than to deter rich foreigners from buying property in the UK. But the rises in Stamp Duty Land Tax in particular, which can be as high as 15 percent in some cases, have been cited as another major reason why HNWIs might be searching for pastures new.
Then, of course, there is the elephant in the room that everybody is talking about: Brexit. And it is probably no coincidence that Italy has chosen to introduce its tax scheme at a time when the UK’s future economic relations with the EU remain so uncertain, particularly with respect to access to the single market for financial services. It will be interesting therefore, to see if other EU member states eyeing up a slice of London’s financial market – France and Germany have shown predatory intentions in this regard – now proceed with similar measures to poach London’s bankers and businesspeople.
For more information on this, and other topical international tax matters, please visit: https://www.cchgroup.com/roles/corporations/international-solutions/research/global-tax-weekly-a-closer-look