TheChek News Flow

Push for Budget reforms to allow foreign residents to pay tiered charges amid fears of exodus of rich

Wealthy foreigners and their advisers are urging chancellor Rachel Reeves to replace the UK non-dom regime in this month’s Budget with a new system modelled on Italy’s flat-tax system that they say would halt an exodus from Britain.

Foreign Investors for Britain, a lobby group set up after July’s general election, has proposed a so-called tiered tax regime that would exempt non-doms from inheritance tax on non-UK assets and free from UK tax on foreign income, gains and certain UK investments for up to 15 years. 

They would pay a tiered annual charge to do this, ranging from a £200,000 charge for net wealth up to £100mn to a £2mn charge for net wealth over £500mn. 

The previous Conservative government pledged in March to abolish the non-dom regime that allows wealthy foreign residents to avoid paying UK tax on overseas income, cutting the amount of time that people can benefit from the perks of the status from 15 years to four. 

The Labour government confirmed it would implement these changes and pledged to tighten the rules further by removing the ability for non-doms to use trusts to shelter their overseas assets from UK inheritance tax.

Non-doms, their lawyers and tax advisers have urged the government to dilute these proposals, amid warnings that it would bring in little revenue and concerns that wealthy foreigners are already leaving the UK for countries including Italy, Switzerland and the United Arab Emirates. 

Their main issue is with the new inheritance tax rules and Reeves is considering dropping this element after being told that making non-doms’ entire global estate subject to UK inheritance tax could cause people to emigrate.

Leslie Macleod-Miller, chief executive of Foreign Investors for Britain, said: “The government is saying that they’re determined to lead the way on growth but we’re concerned they’re leading those who have the ability to partner with the government on growth to other jurisdictions.” 

Foreign Investors for Britain’s proposal for a tiered tax regime follows the success of a flat tax that was announced eight years ago in Italy by then prime minister Matteo Renzi’s centre-left administration. 

As part of a series of tax breaks designed to reverse the country’s infamous brain drain and lure wealthy foreigners, a newly arrived resident — or an Italian who has lived abroad for at least nine years — can pay a flat tax of €100,000 a year on any foreign income and assets for up to 15 years, and be fully exempt from inheritance tax on foreign assets during that period. In August prime minister Giorgia Meloni’s cabinet approved a rise in the annual levy to €200,000.

Macleod-Miller said that their proposed tiered tax regime for the UK “speaks to reform, gives certainty and is fair because those with the broadest shoulders bear the heavier burden. It has a simplicity to it and will provide real revenue that will go straight into frontline services.” 

Reeves hoped to raise £2.6bn over the parliament from her crackdown on non-doms, including £1bn in the first year.

A new report published on Wednesday by consultancy Oxford Economics on behalf of Foreign Investors for Britain suggested that, instead of raising additional revenues, Labour’s proposed non-dom reform could cost £900mn in 2029-30 and said that the lobby group’s alternative proposal would raise £1.1bn for the exchequer in 2029-30.

Foreign Investors for Britain, which is funded by non-doms and their advisers, is due to speak to Downing Street about such a tiered tax regime on Thursday. Last month it presented research to officials at the Treasury and HM Revenue & Customs showing that 83 per cent of non-doms identified inheritance tax on worldwide assets as a key driver of any decision over whether to emigrate.

In June, research by a dozen law firms and one accountancy firm found that around 4 per cent of the 300 or so non-dom clients surveyed had been planning to leave the country within two years before the March Budget. This rose to 55 per cent after the then Tory chancellor Jeremy Hunt’s Budget announcements.

In contrast, 80 per cent of respondents said in the June survey they would be willing to remain UK resident for a longer time if a special tax regime were offered, that required annual payments of a pre-determined sum, like that in Italy.

“It’s not about tax breaks for wealthy people. It’s about recognising that these people are highly mobile and there is a very strong international competition to attract them,” said Damian Bloom, partner and head of private client at law firm Taylor Wessing, who has been working to co-ordinate the industry response.

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UK luxury brands in risk of going from riches to rags

Mulberry and Burberry in need of a drastic change of style

“Heritage” features large in the marketing mythology of the world’s ritziest brands, signalling such virtues as longevity and timeless craftsmanship. “Heritage,” says Clive Black, retail specialist at brokers Shore Capital, is an invaluable aid to brand recognition, “and a huge challenge for those that don’t have it”.

But it is also a double-edged sword in an industry that sets out to test tradition and celebrates season-to-season mutability. Looking back can be a difficult way to move forward. 

Few luxury goods companies cling harder to their heritage than Burberry and Mulberry, the UK’s only two listed makers of deluxe clothing and leatherwear. The former makes much of the legacy of Thomas Burberry, who designed a light, breathable, rainproof fabric that was used by explorer Sir Ernest Shackleton and British soldiers in the trenches in the first world war. Mulberry — smaller but the UK’s largest maker of top-notch bags and belts — talks of its roots in stereotypical British pursuits of hunting, shooting and fishing. 

Both are struggling with losses and thinning margins, having tried to push into lucrative new markets and alienating customers with big price rises. Both are entering a period of brutal change under new managements whose first task must be to leave the past behind.

During the heyday of British chic, about 15 years ago, the brogueish and outdoorsy charms of Le Style Anglais and Mulberry’s Alexa satchel were all the rage. Mulberry’s shares were close to £25 then. The group’s price was more than 60 times earnings and its market value was £1.5bn. It is now a stock market titch, valued at about £80mn.

Last month, even as Mulberry’s new chief executive Andrea Baldo lyricised the group as “a beloved brand with a proud heritage”, he announced an emergency £10mn cash call from Mulberry’s two biggest shareholders — the Ong family of Singapore and Frasers group, the retail empire of Mike Ashley, which own 93 per cent between them. 

Mulberry, it seemed, lost £34mn before tax in the year to March, against pre-tax profits of £13.2mn the year before. Baldo made clear that the cash is needed urgently if the group is to keep its Somerset factories going and its stores open. Revenues so far this year are down nearly a fifth on last year, the company said.

Frasers group, owning about 37 per cent of the shares, responded with a 130p-a-share bid, raising it to 150p-a-share. The Ong family, owning 56 per cent, has rejected both. For the moment the Ongs are backing Baldo: he outlined plans to reposition the brand, ditch the company’s (expensive) strategy to expand its overseas store estate and retrench to the core UK market, which represents nearly 60 per cent of sales. 

Frasers — said to be aggrieved that Mulberry has largely stopped distributing its kit through Frasers’ department stores — is dismissive. It is clear, it says, “there is no current commercial plan, turnaround or otherwise”; and that £10mn will not be enough. Mulberry will have to go back to shareholders cap in hand unless, Frasers adds cryptically, “there is very real change”. Mulberry’s board is caught between the two sides. Other shareholders can only watch from the outside as the battle unfolds.

Mulberry’s riches-to-rags tale should resonate with Burberry investors. 

In essence, Mulberry forfeited customers’ love more than a decade ago when it began raising prices without convincing shoppers its bags were worth it. It has never recovered. Sales growth has stagnated and costs have risen as Mulberry tried fruitlessly to expand overseas and control its distribution channels. 

The rather bigger Burberry has expanded more successfully. Only a tenth of its sales are UK-based. Yet it too has had to learn that high prices alone do not earn brands places at the high table of fashion. 

In essence it has failed in its ambition to turn its check and trenchcoat into the ultimate in swank on the Rue du Faubourg Saint-Honoré, ranking alongside the likes of Gucci or Chanel. 

In particular, it has failed to win over aspirational Chinese buyers who have largely driven the growth of the fashion industry for the past two decades. That is all the more painful since the personal luxury goods market has more than doubled in value since 2010, according to consultants Bain.

The group’s abiding mistake, say onlookers, was to turn off customers — as Mulberry did — by yanking up prices of products, notably handbags, to protect juicy margins just as consumers across Asia, the US and Europe began tightening belts. The rich might still shell out £8,000 for a Chanel clutch but not £1,700 for a Burberry “snip” tote or trenchcoat.

Burberry’s shares are half what they were in 2011 and the market value of the group has more than halved to £2.25bn. In July, Burberry admitted it expected to make a first-half loss and suspended its dividend. Last month, the group was relegated from the FTSE 100 Index of top UK companies. 

Burberry wasn’t the only company that didn’t see what was coming. Fashionistas aplenty assumed, after the post-Covid shopping bonanza, that the wealthy would just keep on shopping. It was a shock when they didn’t. Kering, which owns Gucci, said in July for instance that operating income could decline by up to 30 per cent in the second half of this year. 

UBS analysts worry the downturn will last a while yet. Key data points, UBS says, are not encouraging for a quick recovery: Swiss watch exports, tax-free shopping receipts and consumer confidence everywhere are down. “The industry seems to be entering its own specific cycle,” says UBS. High prices and little product innovation has led to consumer “fatigue”. “Some players may need to restore [the perception of] value for money.” That will be a challenge for groups maintaining plush store estates. Burberry more than most.

“It is hard to tell what the CEO change [at Burberry] can bring”, say analysts at BNP Paribas Exane. They note the futility of “persistent attempts in recent years to reignite sales growth and improve profitability”. BNP reckons ebit margins are down to 2.2 per cent. The only upside risk would be a bid, it adds, but “we don’t see any prospective buyers”. 

Certainly, the shares at a little above 600p are hardly a steal at nearly 300 times BNP’s forecast earnings to March 2025, dropping to 27 times in 2026. That assumes the company restores adjusted earnings before interest, tax and amortisation to about £150mn (against £418mn in 2024). 

To do so may involve more than streamlining costs and recalibrating prices. As Black from Shore Capital says: “Brands have to evolve.”

The group mutters about being more inclusive and re-engaging with core customers. But it balks at suggestions that the brand will become more affordable and its latest catwalk was full of Burberry tartans and trenches. The danger, if Burberry doesn’t reimagine its heritage more drastically, is that someone else will — much as Mike Ashley is reimagining Mulberry. 

Brussels seeks powers to block ‘killer acquisitions’ in Europe and beyond

Reforms would allow EU regulator to intervene on takeover deals where companies try to stymie smaller rivals

Brussels plans to expand its powers over merger deals in order to stop “killer acquisitions” that pose risks to start-ups in Europe and beyond, according to people familiar with the discussions.

The European Commission, the EU’s top competition enforcer, has pledged to overhaul its rule book on mergers and acquisitions for the first time in decades, including by revising when and where it can intervene on deals.

The reforms under discussion would aim to significantly extend the commission’s jurisdiction to mergers involving companies that generate most of their revenue outside Europe, three people familiar with the plans told the Financial Times.

One option under consideration would be to introduce a new threshold for taking over scrutiny of a merger, which would be based on the value of the deal rather than relying on the existing turnover criteria, the people said.

While the details of the reforms are still being debated, one of the priorities for the EU’s incoming competition chief, Teresa Ribera, will be addressing the threat of so-called “killer acquisitions”.

Commission president Ursula von der Leyen urged Spain’s nominee in her mission letter to tackle the risks of foreign companies attempting to take over smaller rivals in order “to eliminate” competition.

The proposed changes come after Brussels claimed jurisdiction over biotech company Illumina’s $8n acquisition of cancer screening start-up Grail, even though both are based in California and lacked revenues or presence in Europe. Brussels lost its case after the EU’s top court said it had no legal basis to scrutinise the transaction, leaving officials scrambling for options.

Companies hope the revised rules will bring legal certainty by clarifying when transactions must be notified to the commission, mainly in cases where small but high-growth potential companies are bought by larger incumbents. 

But some officials are worried such reforms would open a “Pandora’s box” — giving EU member states the possibility to introduce reforms that are favourable to their markets, or shift powers from Brussels to national competition authorities.

Other EU officials have discussed giving the commission more powers to call in mergers even without the prior consent of member states — a less palatable option since it is likely to face opposition from countries such as France and Germany.

Any reforms will still need the commission, the EU’s executive, to start the formal consultation process, and it could take years before any changes happen, the people said. Ribera would first need to be in office, with the legislative process expected to start next year.

A commission spokesperson declined to comment.

Some estimates and theories

China’s stimulus

The Chinese government’s decision to boost the stock market with monetary stimulus resulted in a buying frenzy. Shanghai and Shenzhen’s CSI 300 index jumped 25 per cent and Hong Kong’s Hang Seng index leapt 21 per cent in just two weeks. But things have cooled off since:

When the stimulus was first announced, we argued that for this rally to have legs, the Chinese government would need to incentivise consumer spending and put money directly into the real economy. While the government has signalled that fiscal stimulus is coming, it has been sparing with the details — much to the frustration of investors.

It remains unclear what President Xi Jinping and his government want from the stimulus effort. Some believe that they intend to address the structural problems in the economy. Another possibility is that the government just wants to make sure to hit its 5 per cent GDP growth target this year. Others feel that the effort will be merely cosmetic, aimed at making China’s markets look more appealing. It’s hard to tell which view is correct. While Xi has been known to be sceptical of stimulus in the past, the ministry of finance just laid out a substantive four-part stimulus framework (support real estate investment, address local government debt, boost bank lending into the real economy, and support consumers).

How much stimulus would be enough to get the Chinese economy out of the doldrums?

Start with real estate. The government has announced that it will issue bonds to local governments to allow them to buy back idle land and unsold new homes from developers. One detailed estimate from the French bank Natixis says that would cost about Rmb3tn ($421bn), assuming that the government will buy the properties at 70 per cent market value, which may not be the case.

Next, local government debt. Local governments have a lot of “hidden” risky debt on their balance sheets due to falling real estate values and the shuttering of companies during Covid; estimates range from Rmb50tn-Rmb80tn ($7tn-$11tn). According to reporting from Bloomberg out yesterday, China is considering allocating Rmb6tn ($853bn) through to the end of 2027 to help resolve risky local debt.

The other two priorities — bank lending and consumer support — are even harder to put numbers to. The government has said little of substance. But past stimulus provides clues to what Beijing might be prepared to do across the framework, if there is a real sense of urgency. After the great financial crisis, the Chinese government issued Rmb4tn (about $580bn at the time) of stimulus over a few years. Putting that in today’s GDP terms, that would be about Rmb16tn ($2.2tn). But, given the government’s reticence to put out official numbers, we doubt they will pursue stimulus of quite that scale.

Quantifying the stimulus needed to hit 5 per cent GDP growth is more straightforward. Economists polled by Reuters predict that, at the current trajectory, China’s annual growth rate will be 4.8 per cent at year’s end. Assuming that trajectory is right, the gap between hitting China’s 5 per cent target and the current path is about Rmb252bn of additional output by year’s end, or $35bn. China could try to take the “easy” way out by reaching that directly, either through government purchases or direct investments (as we stated in the past), or by doubling down on its current efforts to boost exports.

But, according to Eswar Prasad at Cornell University, formerly the head of the IMF’s China division, “[while] fiscal stimulus in the range of half to 1 per cent could be powerful and help achieve this year’s growth target, it is not going to fundamentally alter the trajectory of household consumption or private investment, both of which the [Chinese economy] really needs”.

What if the goal is simply to support the animal spirits behind markets? “The markets want this instant gratification, such as [the central government] spending 1-2 per cent of GDP in the next 12 months,” said George Magnus of the China Centre at Oxford university. While Magnus doubts the government actually wants to stimulate the economy in the ways markets expect, it is possible that Beijing can just try to signal to investors that it is serious with a one-time “bazooka” of cash, to the tune of Rmb1tn-Rmb2tn (1-2 per cent of 2023 GDP, or $140bn-$280bn). The government could also satisfy investors by tacking on other gestures, such as issuing more business visas, or scaling back its crackdowns on western businesses.

The ambiguity about what the government hopes to achieve, and what means it will use to achieve it, leaves only one option for serious investors interested in Chinese equities: wait and see. The backbone of any effective intervention in the economy or markets is clear communication. Without it, there cannot be investment, only speculation.