7 December 2018

How to fix ‘golden visas’


This week, the government announced that they were suspending the Tier 1 Investor visa scheme over money-laundering concerns. Known informally as the “golden visa”, foreigners who invest £2 million in the UK gain the right to live and work here and can apply for permanent residency after five years (or sooner if they invest more).

Recently, there have been fears that rather unsavoury characters linked to human rights violations and corruption have used the scheme to enter the country. As a result, the scheme has been suspended and in the meantime, the rules around who can and can’t get the visa will be tightened.

The reforms will also restrict the categories of investment that can be used to qualify for the visa. In the past, the most common form of investment was in gilts. The ultra-safe investments may have reduced the cost of financing the UK’s budget deficit, but not by much. Sir David Metcalf noted in 2014 that “the annual aggregate loan via the investor route is equivalent to less than two days of our budget deficit”. This is a welcome reform but there is opportunity to do better.

The crackdown on investor visas has arguably come at a bad time. Britain should not be pulling up the drawbridge to foreign investors on the eve of Brexit. We’re also facing stiff competition from overseas. Malta are selling EU citizenship for €650,000, while Portugal, Ireland, Spain, and Hungary offer residency for better value. The UK still has advantages, such as world-class private schools, but depending on the outcome of Brexit investors may look elsewhere.

It is of course right to stop human rights abusers and corrupt oligarchs from using the visa to escape sanctions and launder their wealth. But it would be foolish to close the door on legitimate investors. We should not lose sight of the fact that we ought to be doing whatever we can to attract legitimate foreign investment to the UK.

Beyond the investment, wealthy investors typically stimulate demand within the UK economy allowing us to import more and enjoy higher living standards. Additional jobs for tutors, nannies and housekeepers shouldn’t be sniffed at.

Yet under the status quo, the investment itself is not delivering the benefits it should to the UK. The previous practice of investing in gilts offered few tangible benefits, and direct investment in FTSE 350 companies arguably isn’t much better. Up to 71 per cent of the revenues generated by companies listed on the FTSE 100 come from abroad. The night of Britain’s vote to leave the European Union was a stark demonstration of this. Despite the pound falling as a result of weaker growth and higher inflation expectations, the FTSE 100 actually rose.

If the aim of the investor visa is to promote job and wage growth in the UK then a better system would target investment towards the UK start-ups and scale-ups need capital the most. SMEs often struggle to prove their viability to investors as they lack collateral or a track record. While fintech innovations such as crowdfunding are helping to solve this problem, there is still an equity gap affecting firms seeking equity investments of between £250,000 and £5 million.

To resolve the funding gap, the government has developed extremely generous tax reliefs aimed at early stage investment in start-ups and venture capital funds. The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) are well-established programmes to channel more investment into risk capital. Importantly, the rules surrounding the schemes are strict and designed to prevent abuse (such as investments in low-risk ventures such as buy-to-let property or connected businesses).

Restricting access to the Tier 1 Investor Visa to EIS or VCT qualifying investments would ensure that cash flows to the firms best able to create new jobs and grow. Given the risk involved, the existing £2 million minimum investment requirement may make the UK unattractive to legitimate investors seeking the visa. It should be lowered to either £1 million (as it was in 2014) or even further. The tax reliefs could even be limited for foreign investors to protect UK taxpayers, but could be worth keeping, as they may encourage investors to generate tax liabilities in the UK.

Last year, 350 Tier 1 Investor Visas were granted. That’s down from a peak of 1,172 in 2014 when the threshold was set at £1 million. Reforming the ‘golden visa’ could unlock over £350 million in investment for UK startups (and plausibly much more).

Fixing the investment visa would make Britain a better place to found and grow a business. That’s necessary, now more than ever.

Sam Dumitriu is Research Director at The Entrepreneurs Network.