A rising number of foreign-born wealthy individuals are being driven out of the UK, confounding the notion that the country has been a lure for such persons, a senior lawyer claims.

(Editor's note: As the summer holidays wind down, we thought readers might appreciate a chance to revisit some of the stronger, and more controversial, items that have been published on this news channel since the start of what has been an eventful year.)

Since the financial crisis, governments worldwide have made it a key priority to increase transparency and crack down on tax evasion as they seek to plug budget holes and appease growing public criticism. At the same time, however, they have also sought to lure wealthy foreign investors through special tax breaks and visa regimes.

There have been a raft of measures worldwide and the evolving regulatory environment represents what many commentators see as the single largest challenge facing the wealth management industry today.

The UK, for example, has also taken a tougher stance to some extent, with a number of policies designed to tackle tax evasion and forms of avoidance, including plans unveiled in April to make it easier to prosecute those that evade taxes by "hiding" their money offshore. It has also introduced what is called a general anti-abuse rule (GAAR).

Despite the widely held view that the UK has become a magnet for foreign high net worth individuals attracted by a favourable tax regime and flexible visa regulations, wealthy individuals from abroad are actually being driven away by what they view as increasingly hostile legislation, James Quarmby, partner and head of private wealth at international law firm Stephenson Harwood, told this publication in a recent interview.

“The UK government's approach is slightly schizophrenic as on the one hand it is encouraging rich foreigners to come live here by issuing visas to high net worth investors, while on the other the tax law is bashing them on the head,” said Quarmby.

“There has been a trend for non-domiciliaries to leave because they feel unwelcome. I have expatriated quite a few clients. It is mostly Asia and Middle Eastern people that have left, as well as some Russians,” he added.


The remittance basis charge

Introduced in April 2008 by the former Labour-led government, the remittance basis charge is the annual levy paid by long-term UK resident non-doms to protect their non-UK income and gains from UK tax, provided the money is not remitted to the UK.

The charge starts at £30,000 ($50,550) for those that have been based in the UK for seven years, increasing to £50,000 for longer-term UK tax residents that have been resident in the UK in at least 12 of the previous 14 UK tax years.

Quarmby believes the introduction of remittance basis charge has been one of the main factors contributing to non-doms leaving the UK and he also criticised the government for the way it had hounded foreign nationals over their tax affairs.

"The Revenue mishandled the message at the time the remittance basis charge was introduced. The head of HM Revenue and Customs said in 2008 that if people paid the £30,000 charge then they would be left alone. However, these words ring hollow as it is clear that HMRC has been been systematically investigating people who are paying the remittance charge," said Quarmby.

"There have been quite a few Code of Practice 9 investigations, which are generally reserved for the most serious type of tax fraud, launched against ordinary remittance basis taxpayers. One of my clients that was investigated was so horrified at how he was being treated that he just left the country. Incidentally, HMRC subsequently admitted that they had no case against him. I do not think that this type of behaviour has been good for our economy as foreign businesses will want to leave and as a result UK jobs will be lost," he added. Strict liability

In April, the UK government unveiled its plans to introduce a new strict liability offence for individuals that "hide" their money offshore, raising controversy over whether it is undermining due process of law in its zeal for revenue.

Under the new proposals, those that have undisclosed funds offshore could face criminal prosecution with increased fines or be sent to jail, even if they did not intend to evade tax.

At present, HM Revenue and Customs must demonstrate that when someone has failed to declare offshore income, the individual intended to evade tax. Under UK law you can only generally be guilty of a crime if you intended to commit a crime - this protects people who make innocent mistakes. However, under the new regime, to bring a successful prosecution, tax officials will only have to demonstrate that the income was taxable and undeclared, regardless of the motivation of the individual in question.

"As a lawyer, I find this terrifying. Normally you would only have strict liability laws for minor administrative offences. If you bring in a criminal offence for someone that has money undisclosed in an offshore bank account without taking into account the intention to evade tax, we are on very dangerous ground," said Quarmby.

"When you have a backdrop of intense regulation including OECD and EU, along with criminal laws, it makes people nervous. The reason that London is so successful, and as a result the UK, is because foreigners come here, bring money, jobs and pay taxes. If you are making your investors nervous they will possibly not invest in this country, and that is what I am worried about," he added.

Capital gains tax

UK chancellor George Osborne announced in last year’s Autumn Statement that foreign property owners will pay capital gains tax on any gains in value when they sell their UK properties.

This was in response to worries that wealthy foreign investors were helping to inflate the London property market, where prices have risen more than 10 per cent in a year, stoking fears ahead of the 2015 election that many people in Britain may never be able to afford their own homes.

“Capital gains tax has always been a territorial tax paid by UK residents only. Foreign property owners were exempt from it, which was a massive benefit to the UK property market as it kept prices going, driving the economy forwards. The question is, what do you do now if you are a foreign property investor?” said Quarmby.

In March 2014, the government published a consultation document outlining new taxes and charges to be paid by all non-residents who own property in the UK. Legislation in 2013 had already introduced a new super-rate of stamp duty of 15 per cent, plus annual charges and CGT on sale for UK homes owned by non-UK companies.  The new law, if it comes in, will affect all owners, not just companies.

“As a result of these changes, there will be an increase in revenue for the Treasury, but you have to look at the bigger picture. Investors will have a second look and maybe think about investing elsewhere because property costs are going to climb,” said Quarmby.

“It will inevitably mean that the UK is a less attractive place to invest in for property.  I think that the government has overstepped the mark and these measures will reduce foreign investment over time, which will lead to a reduction in the  overall stamp duty take, VAT and other taxes collected from property investment,” he added.

The GAAR

In order to strengthen its anti-avoidance tax strategy and help tackle aggressive avoidance, the UK government introduced the GAAR in July 2013.

The GAAR applies to “abusive” tax arrangements, defined as “any arrangement which, viewed objectively, has the obtaining of a tax advantage as its main purpose or one of its main purposes”. It covers most taxes, including income tax, corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty, and annual tax on enveloped dwellings.

"One of the problems with the GAAR is that it will override treaties which are designed to facilitate trade. If you start making it difficult for investors to invest their money in the UK, because they are not sure the treaty is going to be respected, you are in trouble. This is witnessed with the Indian government when it imposed a capital gains tax on money going through Mauritius, the jurisdiction where most of foreign investment passes through. As a result, foreign domestic investment plummeted," said Quarmby.

Quarmby believes that if governments go too far when trying to solve problems relating to tax it can be counter-productive as less money may end up being brought in overall. He argues that businesses should be allowed to carry on without interference from the Treasury, as if successful, more tax will be paid as a result.

"The UK benefits significantly from foreign direct investment. Businesses want predictable outcomes when they invest. However, uncertainty can make them nervous and suppresses investment. I think the government has to be careful how far it wants go with the GAAR as if it starts overriding international treaties intentionally, it will be unhelpful to our economy and could well be unlawful. The argument is that if you go too far, it is counter-productive and you bring in less tax in the long-run," added Quarmby.