TheChek News Flow

Jeremy Hunt’s move is blatantly political but there are good arguments for reform

It is a century since the curious concept of domicile was embedded in the UK tax code. Chancellors stretching back to Nigel Lawson in 1988 have considered overhauling this relic of empire.

So Jeremy Hunt’s move to scrap domicile-based reliefs, benefiting those whose permanent home is abroad, is genuinely radical. It risks making the UK less attractive to wealthy foreigners. But this is an opportunity to create a cheaper, better-targeted relief.

Hunt’s move is blatantly political. Still, there are good arguments for reform. Firstly, domicile is a concept — that transcends nationality, residence and ethnicity — which few people understand. Secondly, the mechanics of the non-dom system have perverse implications. It relies on the remittance basis, a concept dating back to the introduction of income tax in 1799, to keep foreign income and gains out of the tax net unless they are brought into the UK. 

One awkward consequence is that qualifying as a non-dom requires people to keep a connection with another country. That makes their eventual departure from Britain more likely. Another perverse aspect is that it encourages rich individuals to set up home in Britain but leave their wealth outside it. A business investment relief introduced in 2012 is not much used.

Hunt’s reforms are an improvement in this regard. New arrivals will be exempt for four years from paying UK tax on foreign income and gains — including those remitted to the UK. There is also an incentive for current non-doms who are ineligible for the new regime to bring assets onshore. 

Keeping some form of tax concession for newcomers makes sense, not least because other countries such as Italy, the Netherlands and Spain have similar incentives. But the regime outlined by Hunt is a lot less generous than the scheme it replaces. An estimated 5,500 people are set to pay UK tax on their foreign income and gains from 2025.

Transition arrangements ease the pain. And the chancellor is likely to have drawn reassurance from research showing a minor impact from 2017 reforms that increased taxes for those who had been in the UK for more than 15 years. But some backlash is inevitable: there is a risk that the reforms drive away a greater number of high earners than expected.

A lot of guesswork is involved here. The Office for Budget Responsibility reckons that between 10 per cent and 20 per cent of current non-doms who are ineligible for the new regime will leave the UK. There is a high degree of uncertainty about whether the initiative will raise the mooted £2.7bn a year.

There is also a risk of alienating workers, investors and entrepreneurs that the UK wants to attract and keep. The City of London may be wary. More than one in five high-earning bankers — those in the top 1 per cent of earners nationally — have benefited from non-dom status at some point, according to research by the LSE and University of Warwick.

Change was coming anyway. The Labour party, which has a huge poll lead, had pledged to introduce a less generous system. It would be good if some cross-party consensus could be achieved on the reforms. After years of political turmoil, attracting the best and brightest also requires the UK to regain its reputation for stability.

UK chancellor says the move would encourage the wealthy to sell, so boosting state coffers and freeing housing supply

Higher-rate taxpayers selling residential property in the UK will pay less capital gains tax, the chancellor announced in the Budget on Wednesday, arguing the measure would increase tax revenue. 

Jeremy Hunt said the tax paid on capital gains from such transactions would fall from 28 per cent to 24 per cent for higher-rate taxpayers from April after government studies showed the change would raise revenue by encouraging more people to sell. 

Homeowners in the UK generally do not pay capital gains on their main residence, so the changes will mainly affect private landlords and second homeowners. 

The change came alongside two other changes that are likely to cost those groups more — abolishing tax relief for some holiday lets in 2025 and ending the multiple dwelling relief from stamp duty land transaction tax this year. The Treasury said the three measures would raise an additional £605mn in 2025-26. 

Lucian Cook, head of residential research at estate agent Savills, said the measures appeared tailored to “‘raise more revenue, as much as to address the housing crisis”. 

“The biggest implications are going to be for private investors and, to a lesser extent, second homeowners,” he added.

The Treasury said the capital gains changes would “encourage landlords and second homeowners to sell their properties, making more available for a variety of buyers, including those looking to get on the housing ladder”. 

Against a backdrop of consistent underdelivering of new housing supply, the government is looking to use the tax system to push for existing homes to be used more efficiently. 

Some analysts had argued for a change to stamp duty to encourage downsizing by homeowners who have more space than they need. The impact of the capital gains tax changes will be limited because they do not apply to main residences. 

Hunt also abolished the furnished holiday lets regime, which gives tax breaks to holiday rental businesses. The chancellor said the scheme, which is more favourable than the tax paid by long-term landlords, created “distortion” by encouraging people to turn rental homes into holiday lets.

A 2022 report from the Office of Tax Simplification found that the rules benefit a “relatively small core of people running a substantial short-term letting business, and a long tail of second-home owners renting one property”.  

Michael Gove, levelling up secretary, last month pushed ahead with other policy changes to crack down on holiday lets, which he blames for hoovering up housing supply in tourist areas. He said the government plans to force second-home owners to seek planning permission to create new short-term lets, and create a mandatory national register of short-term rental properties.

Hunt said the changes announced in the Budget would “make the tax system work better for local people”. 

Tax relief for buyers of multiple homes in one transaction will also be scrapped. Hunt said rules that allow purchasers of multiple dwellings to pay less stamp duty were designed to encourage investment in the private rental sector. But he said there was “no strong evidence” that it does so, and that the relief was “regularly abused”. 

The British Property Federation said the change could hit investors wanting to buy badly needed rental homes. 

Overall, the Budget disappointed hopes of a big move to help boost the property market, help first-time buyers get on the housing ladder or increase housing supply. 

Graham Prothero, chief executive of housebuilder MJ Gleeson, said: “We didn’t expect a lot, and we got a bit less.”

Digital tokens authenticated on blockchain ledgers offer the potential to make buying and selling assets much easier

To some investors, the term “tokenisation” may conjure up images of colourful monkeys. But the same technology that created Bored Ape Yacht Club Non-Fungible Tokens — unique digital cartoon artworks, authenticated on a blockchain ledger — also promises to shake the tree of global finance.

What crypto mania and the digital art craze have both highlighted is that blockchains and other distributed ledger technologies can tokenise almost any asset — real or imaginary. 

The finance industry may stand to be one of the biggest beneficiaries of this stage of the digital revolution. So far, adoption has been slow. However, clear benefits are beginning to overcome the establishment’s inertia. For example, the largest ever digital bond issuance, worth about $750mn, was carried out by the Hong Kong government in February. Notably, the bonds were issued directly on to HSBC’s private blockchain, Orion, providing the benefits of digital tokenisation — such as cheaper, quicker trading — from the outset.

Of these benefits, the largest, and most immediately obvious, is short settlement time. For the recent Hong Kong bond issue, this fell to just one day (referred to as T+1), compared with the traditional five days for a conventional Hong Kong bond issuance.

“What we can see with digital bonds is shorter and more efficient settlements that will free up capital and can eventually alter the underlying structure of markets,” says John O’Neill, HSBC’s Global Head of Digital Assets Strategy. 

O’Neill thinks tokenised bonds have moved from trial phase to implementation and are on a par with conventional bond markets, in terms of liquidity and demand.

Shorter settlement time, and the lower costs associated with that, are not the only benefit of a tokenised issue, though. For the Hong Kong bond, coupon payments and secondary-market trading settlement will take place on the more efficient private blockchain.

Traditional securities, such as bonds and equities, are just the tip of the iceberg when it comes to the potential use of digital token technology by big finance.  

“Digital art and NFTs showed us how tokenisation can be used for fractionalisation, which can in principle be applied to any fungible or non-fungible asset, from gold to real estate” says Michael Silberberg, head of investor relations at hedge fund AltTab Capital. Fractionalisation enables a single asset to be divided up into a large number of smaller parts, with ownership of each part certified by a digital token.

However, breaking assets down into smaller chunks is just the first step to unlocking tokenisation’s potential. A token that contains details of ownership corresponding with a blockchain — and backed with the proper legal protection — then becomes a bearer instrument for whoever owns the private key that controls that token.

“Tokenisation extends the entire universe of collateralisable assets,” says Ralf Kubli of the Casper Association, a decentralised blockchain project. It means that lenders become able to accept all kinds of tangible and intangible assets in return for financing — and they can do so with greater certainty that the collateral exists and that their claim on it is legitimate. 

Everything from manufacturing machinery to pharmaceutical recipes or software could be collateralised efficiently, and without the costs of escrow or other security guarantees. To fully unlock the technology, though, Kubli thinks the smart contracts need to become much more sophisticated.

Information on the liability side of the equation needs to be embedded with tokens; namely getting the cash flows that the collateral generates into a machine-readable and executable format. Blockchain technology then comes into its own with the ability to observe and verify this information which creditors can act upon, if needed. 

In essence, that would produce close to real-time balance sheet information. When combined with the ability to fractionalise assets, it could have huge implications for financial services. Securitisations would move beyond today’s black box instruments, that are priced on snapshots of data from six months ago, into instruments that are easier and faster to monitor, trade and price.

That extends the list of potential benefits well beyond more efficient and cheaper settlement times. Standardisation could mean that legal and other advisory fees all fall, because all that information is contained within the token itself. Secondary trading liquidity should also then increase, and market data would be made more readily available, and timely. 

But that end goal may be further away than many hope. “Technology does not change human behaviour overnight, and tokenisation cannot guarantee liquidity or create markets out of thin air,” says Tim Bevan, founder and CEO of ETF provider ETC Group. 

The full potential of tokenisation to reinvent financial services may therefore be the factor that stops the establishment from embracing it fully.

Private equity firm Carlyle Group has begun the sale process of Japanese cosmetics supplier Tokiwa Corp in a deal that could value the company at $800 million, three sources with knowledge of the matter said.

Non-binding bids for the company are expected by mid-March, said the sources, who declined to be named as the information is confidential.

Potential buyers include private equity firms and several companies in the cosmetics industry, said one of them.

The 75-year-old Japanese company has about $50 million in expected earnings before interest, taxes, depreciation, and amortisation (EBITDA), the sources said.

Tokiwa is aiming to fetch a high-teen multiple over the core earnings in a sale, potentially valuing the company at $800 million or more, they said.

Carlyle and Tokiwa declined to comment.

Jefferies and SMBC Nikko Securities are advising Carlyle on the sale, sources have said. SMBC Nikko declined to comment, while Jefferies did not immediately comment.

Carlyle invested an undisclosed amount in Tokiwa in 2019 via its third Japan-focused buyout fund to help the company expand overseas, it said at the time.

Tokiwa, known as a major supplier of eyeliners and brow defining pencils to global cosmetics brands, is engaged in the research, development and manufacturing of cosmetic products and employs more than 800 people around the world.

Carlyle was one of the first global private equity firms to open an office in Tokyo two decades ago and has invested more than 450 billion yen ($3 billion) in more than 30 Japanese companies.