Don’t Overlook Foreign Property Investment

As the UK government hunts for economic growth, one idea is arguably staring them in the face - reverse course on some of its plans for non doms and introduce an Italian-style flat tax for wealthy foreign investors.

The financial logic is straightforward but selling the idea to its own party isn’t. There are rumours the government is reconsidering parts of its plan but there was no mention of a key stumbling block.

The search for growth comes as the Treasury’s financial headroom shrinks and a succession of economic data points in the wrong direction.

Borrowing costs have risen since the Chancellor set out plans to borrow and spend more in the Budget. They spiked higher earlier this month due to inflationary concerns around Donald Trump’s presidency, though have since fallen back.

Capital Economics estimated that rising debt costs had wiped out £8.9 billion of the Chancellor’s £9.9 billion headroom, which means she could be forced to raise taxes or cut spending. Against a backdrop of flatlining GDP, an unexpected jump in government borrowing last week increased the pressure on her.

The Office for Budget Responsibility will deliver its latest economic forecasts and verdict on the Chancellor’s financial room for manoeuvre on 26 March.

Number 11 has called in UK regulators to suggest ideas for growth and recently-floated plans include airport expansions and loosening mortgage lending rules. Treading on the toes of net-zero supporters by considering a third runway at Heathrow must make the idea of encouraging inward foreign investment through the tax system seem less controversial?

The Foreign Investors for Britain (FIFB) lobby group hopes so and believes there are signs the government is prepared to look again at its plans for non doms given the worsening economic backdrop.

“The government is waking up,” Leslie MacLeod-Miller, chief executive of FIFB told Knight Frank. “They need to give a clear signal that Britain supports growth and investment before it is too late. This is now the final call, and the flight is about to leave taking investments – and tax revenue, spending into the economy, job creation and philanthropy – with them.”

Under the old scheme, non doms didn’t pay tax on their non-UK income for up to 15 years under a set of rules that date back more than 200 years. Around 74,000 non doms contributed £8.9 billion in UK taxes in 2022/23.

The new residence-based scheme from April introduces a four-year cap, which means the scheme is less attractive than other countries including Italy, where foreign investors pay an annual flat tax for a maximum of 15 years.

On Thursday, it was reported the government will tweak the so-called “temporary repatriation facility” for foreign investors, which means they can bring in overseas capital at low rates of tax under the new scheme.

However, there was no mention of the biggest stumbling block of making overseas trusts subject to inheritance tax.
Opposition party amendments are likely to push for this, as well as a system closer to the Italian model – a so-called tiered tax regime.

How receptive the government is, depends on how politically palatable the plans are within its own party. But as more investors leave the UK and stamp duty becomes one area where government revenues are being lost, it feels like backs are moving closer to the wall inside Whitehall.