While debate appears open on whether and how the UK's non-dom system will disappear, we talk to a lawyer, author and expert about how wealthy international citizens are taxed, and what's needed to square the demands for fairness and long-term investment into the country.

While debate rages on how and why to tax globally mobile wealth and business owning individuals and families, there’s a risk that the long-term benefits of attracting family-run enterprise and investors will become lost in the din. 

For Philip Marcovici, a lawyer, author and expert on areas such as the international taxation of the wealthy, the wrangling over the end of the UK’s resident non-domicile system, and how much revenue they bring in, misses the broader point. 

Marcovici says that the non-dom system was inevitably likely to end. (Under the system, a foreign person could avoid paying tax on income and other wealth as long as this stayed outside the UK.) But at the same time, Marcovici argues, it is in the interests of the government to encourage international investors, business leaders and budding entrepreneurs to come to the UK and build enduring companies lasting generations.

“The UK should endeavour to create a regenerative tax system,” he told this news service recently, referring to the idea of attracting wealth that, in turn, spawns business that can be a steady source of revenue many years into the future. With decades of experience under his belt, Marcovici divides his time between Asia and Europe.

Recent reports that the Labour government is re-considering its initial aggressive approach to the elimination of the non-dom system are encouraging, Marcovici says. “There are many options for the UK to adopt a simplified and fairer approach to taxation that would attract rather than repel wealth owners to the UK and permit benefit to the economy that can go a long way towards achieving a fairer society,” he said.

To some extent, the debate is a reminder of what is called “supply-side” economics – the idea that between zero and 100 per cent, there is a “curve” that can be plotted to give the optimum level of tax consistent with economic growth. This idea, developed by US economist Arthur Laffer, is contested, although it makes certain intuitive sense, its advocates say. A tension in the argument is that the most optimum tax-raising stance may not, from a “fairness” point of view, be the most politically acceptable. A number of countries, such as former Eastern bloc country Estonia, have embraced flat taxes based on supply-side ideas. In the 1980s, the UK slashed its top income tax rates, leading to a rise in revenues paid, in overall terms, by the wealthy. Under Ronald Reagan in the 1980s, federal taxes were simplified and cut. Countries such as Sweden and France that introduced wealth taxes subsequently repealed them.

Opportunities
While a departure from the EU was, to many, a grave mistake, says Marcovici, one could think that Brexit could help afford the UK an opportunity to carve out an important global role as the premiere location for responsible wealth owners. “This would not be Singapore on the Thames, but rather a reflection of the current and real needs of global wealth owners, UK society generally, and of our world,” he said. 

“The opportunity for the UK to emerge as the country of choice for global wealth and business owners is a very real one, particularly in a world of tax transparency where home governments are increasingly fully informed about the income and wealth of residents,” Marcovici said. “Mobile wealth and business owners need to live in countries the governments of which can be trusted with information about their assets and where tax systems are fair, predictable and straightforward.” 

The UK, according to Marcovici, does not need to offer the lowest tax burdens globally to achieve success. 

“The UK can simply rely on its existing strengths and build on a long-term strategy oriented towards collaboration with responsible wealth and business owners, reliance on the rule of law (and therefore certainty) and simplicity. A taxing approach that recognises the unique elements of the UK and helps to build on its strengths would be one that is regenerative,” he continued. 

“If you want your family to survive for generations, then you have to be a part of the society your family and business rely on,” Marcovici said. 

Author and thought leader, Marcovici is working on a new book that looks at the transformative power of family wealth. He is also the author of Destructive Power of Family Wealth – A Guide to Succession Planning, Asset Protection, Taxation and Wealth Management – published eight years ago. A speaker on such global issues, he’s well used to the complexities of international tax and compliance. 

Marcovici is a founding advisor to the Cambridge Institute of Sustainability Leadership in relation to its Multi-Generational Leadership Programme. The third cohort of the programme will be gathering this November – see here.
 
The CISL programme aims to engage wealth and business owning families internationally to build a leading forum for change which benefits from wide diversity of perspectives and experiences. The programme positions the private wealth ecosystem within the broader global economic and development context, looking at families’ unique context and potential to drive change.

Marcovici also helped to form the Liechtenstein Disclosure Facility between the UK and the tiny European jurisdiction 14 years ago. The facility ended up generating more than £1.25 billion ($1.67 billion) for the UK.

Up-front engagement
Lawmakers should also embrace a pragmatic approach on the non-dom question, he said. Under one of his proposed replacements for the non-dom system, a foreigner agrees to pay at the outset an up-front lump sum, such as three or four times the tax that would be paid in a single year, in return for an agreement by government not to tax their income and wealth above a certain threshold – not for a limited time period, but permanently, encouraging long-term engagement with the UK. 

Under that approach, Marcovici said, the UK receives a large inflow of revenue as well as capital, and wealthy foreigners have a degree of certainty as they build businesses, create jobs and products. In return, those seeking such tax treatment must be fully invested into the country, not simply treat it as a flag of convenience.

“We need to raise awareness among wealth owners themselves that it is in their own interests to collaborate with governments,” Marcovici said. 

There are two groups of wealthy foreigners that count in this debate, Marcovici said: senior executives and entrepreneurs, professionals, etc, who want to work in the UK for a few years before leaving, and wealth and business owners planning to live in the UK for the long term. 

A walk on the supply side
The Labour-led UK government has said it wants to scrap the UK’s non-dom system and replace it with one where persons coming to the UK, if they’ve lived outside the country for at least a decade, can bring in in their wealth, tax-free, for four years. There remains debate on how the inheritance tax situation of non-doms would be affected. Some data points to a sharp reduction in the number of non-doms in recent years.

According to an article in the Guardian newspaper (25 September), government officials fear that ending the non-dom system will not bring in any extra funds for the Treasury. For months, a number of private client lawyers, such as James Quarmby of Stephenson Harwood, have for warned that ending the non-dom system without a suitable replacement will shrink the UK’s tax base, leaving middle and lower-level earners to pick up the tab.

As reported here, the Labour government is reconsidering its position on the way forward. 

“Perhaps the country will see some thoughtful consideration of the value wealth and business owners bring to the UK economy,” Marcovici added.