Stopping the brain drain: how the UK government should rethink its strategy on global talent

The last couple of years have been turbulent for wealthy individuals who once viewed the UK as a prime destination to build businesses, invest capital and raise families. The abolition of the remittance basis of taxation and sweeping changes to inheritance tax and the treatment of offshore trusts have stripped away many of the features that made the UK internationally competitive and attractive to mobile wealth creators. Data from Companies House suggests many individuals have already left and we are advising more who are following them to places like Italy, Dubai, the US and beyond. 

The latest UK Budget signalled a welcome change in outlook from the government: a call for evidence on how the UK can better support business founders and a desire to develop a tax offering for 'high-talent new arrivals'. This is a welcome and much needed shift in tone. To reverse the trend of founders and entrepreneurs leaving and avoiding the UK the Government must act boldly – and quickly. Fortunately, there are many good international examples of what would work and which the UK can draw upon.

A guaranteed tax regime – simple, competitive, predictable

The first step should be the introduction of a new guaranteed tax regime, available for up to 10 years. Italy has shown what can be achieved: a simple system where taxpayers pay a fixed annual charge and are taxed only on domestic income and gains. The UK should now follow suit.

The regime would operate similarly to Italy. Income and gains with a non-UK source would be protected from tax, even if brought to the UK, to avoid disincentivising spending and investment in the UK. It should be available for those who have been outside the UK for at least 10 years as well as those former non doms who left after recent tax reforms. This would give the UK the opportunity to win back the talent it has lost. 

This regime could sit alongside the current foreign income and gains (FIG) regime which is currently available for four consecutive years only but requires no fee to be paid to access its benefits.  

Tie tax to immigration – and offer tax certainty

The regime should be tied to the taxpayer's immigration status. Pay the annual charge and keep your visa.  After 10 years of paying the charge, taxpayers should be able to apply for indefinite leave to remain.  

Crucially, as Italy has done, this regime needs to be coupled with tax certainty: an international move for wealth creators and their families is a significant one. The instability in the UK's tax rules has led to a loss of confidence, but this can be simply remedied. An advanced tax ruling should be available to give taxpayers confidence that the regime will be stable and guaranteed to be available to them for 10 years.

Inheritance tax – a current deal breaker

Inheritance tax changes have been the biggest driver for the exodus from the UK. The guaranteed tax regime should include protection from IHT for trusts on death. This mirrors the existing protection for trusts established by non-doms prior to 30 October 2024. The payment of £5m in tax over the course of 10 years would be a fair price for this ongoing benefit.

The Government has already made the first move: it announced at the Budget a cap on IHT charges on offshore trusts settled before 30 October 2024 of £5m every 10 years. The charge for the guaranteed tax regime would build on this approach, with a guaranteed tax payment of £500,000 per year. It should not matter whether taxpayers happened to be in the UK in October 2024 or not to qualify.  

Our experience acting for globally mobile individuals tells us that this level of charge will be attractive to many wealthy individuals. The highest taxed remittance basis users were already paying over £1m in tax prior to the abolition of that regime and the cost of the popular Italian regime is set to reach €300,000 per year soon. The many attractions of the UK mean it is well placed to command a premium which is amongst the highest internationally, and taxpayers will pay tax on their UK income and gains in addition.   

The reduction in business property relief from 100% to 50% also presents a significant challenge to the business owners in the UK. The need to be able to fund a tax charge of 20% of the business' value operates as a deterrent to moving to the UK and a brake on investment for those who are here. Allowing this charge to be deferred until a sale of the business, in the manner of the conditional exemption for heritage property would preserve the tax revenue and encourage business owners to relocate to and invest in the UK.

Reward founders who stay

The government should also attract wealth creators by introducing a capital gains tax regime for founders of companies, inspired by the United States' qualifying small business stock (QSBS) rules. These exempt from tax gains realised on the sale by the founder investors (those who take the most risk) of their companies, up to a certain value. Today founders have a strong incentive to leave the UK prior to an exit. A targeted exemption would encourage them to stay, recycle their capital domestically and fuel the UK economy.  

Other easy wins

Small changes can have big effects. There are other easy wins for the government requiring modest amendments to existing rules. For example, raising the UK workday limit to 90 from 31 days for non-resident workers and aligning it with other thresholds would encourage them to deepen ties with the UK without becoming resident in the UK. Our experience has been that this is a virtuous circle which leads to more clients investing in and eventually moving themselves to the UK.

Complexity operates as a significant deterrent to international mobility. Different jurisdictions have different forms of entity; Ltds, LLCs, LPs, GmbHs, SAs, SARLs, SCIs, KGs and S Corps, etc all of which have different tax characteristics in different countries. The USA has adopted a pragmatic approach to this issue allowing business owners to determine whether their entity should be tax transparent or opaque. A similar 'check the box' approach in the UK would act as an encouragement to relocation and investment without a loss of tax revenues.

Keeping things simple

Complexity kills competitiveness and simplicity is key to making a new system attractive. The 10-year guaranteed tax regime should be available on a non-consecutive year basis and capital gains tax relief for founders should not be subject to a litany of complex or arbitrary conditions.  

The government now has a golden opportunity to re-establish the UK as the destination of choice for global talent and appears poised to seize it. With bold, targeted reforms, it can turn the tide on the outflow of wealth creators from the UK and attract the capital, energy and entrepreneurialism that the country needs to flourish.