JEAN-PIERRE is profoundly French. He has lived in Britain for more than 15
years, but still speaks with a strong French accent. His wife is French. His
four children speak English and French.
But now, Jean-Pierre, 44, is thinking of selling his handsome house in
Kensington in Central London and moving back to the land of his birth. Why?
“French education is excellent and it’s free,” he said. “The transport system
is excellent. And, yes, there is the tax issue.”
Tax? But surely, for high earners such as Jean-Pierre, Britain is among the
most generous places in the developed world for people living outside the
country of their birth. Income-tax rates are low in comparison with most of
continental Europe. And Britain has a unique system for the taxation of
“non-domicile residents”, or “non-doms” – people who live in the UK but
whose roots are elsewhere.
No wonder so many billionaires make their homes in Britain. Of the top ten
individuals in the Sunday
Times Rich List, seven were born outside Britain. The super-rich – the
likes of Roman Abramovich, the Reuben brothers who made their money in
trading metals, and the Indi-an-born Lakshmi Mittal – are fond of London,
and not just because of the quality of life.
But now, after years of dithering, the Government has signalled its
determination to tighten the non-dom tax rules. And it is provoking alarm
among many of the 110,000 non-doms living in Britain. Even the likes of
Jean-Pierre are considering moving out.
The Government recognises that it needs to tread a fine line. “People from
abroad make a significant contribution both to GDP and to UK tax revenues.
For example, non-domiciled residents contribute some £12 billion to GDP and
£4 billion to income tax alone,” said the Treasury in a consultation paper
this month. Put simply, it doesn't want to drive away the non-doms – of whom
more than a third work in financial services. On the other hand, “rules
applying to people from abroad should operate fairly”.
In the debate so far, attention has focussed on a government proposal to
impose a flat rate £30,000-a-year levy on people who claim non-dom status.
For some non-doms, £30,000 is no small matter. In the case of a married
couple, both would have to pay it if they chose to retain their non-dom
status. And it would come out of taxed income: to foot the £60,000 total
bill, they would have to earn an extra £100,000. And the US Embassy has told
the Treasury that Americans will not be able to offset the levy against tax
bills at home. That could mean the effective rate is doubled yet again. One
American non-dom said: “When you look at it like that, it begins to hurt.”
But for the super-rich, the suggested levy is little more than a flea-bite.
Vince Cable, the Liberal Democrats’ Treasury spokesman and acting party
leader, has pithily observed that for someone like Roman Abramovich, owner
of Chelsea Football Club, the charge would be “not much more than a round of
drinks at half time at Stamford Bridge”.
And in any case, the Government is suggesting that the levy should be paid
only by people who have spent at least seven of the previous ten years in
Britain. Hence most non-doms would be untouched by the levy: fewer than one
in ten stay in Britain for eight years or more.
The Treasury estimates that the proposed levy would bring in £350m in 2009-10
and £200m in 2010-11 – a long way short of the £3.5 billion that the
Conservatives were suggesting when they first mooted the idea of a flat-rate
tax for people who wanted to retain their non-dom status.
So for the very rich, the £30,000 proposal is small beer. What is far more
significant is the Treasury’s indication – yet to be fleshed out with any
detail – that it will change the treatment of capital gains made overseas.
And for the likes of Jean-Pierre (not his real name) this could make a real
difference. Last year, he paid £3m in UK income tax. If he returned to
France and maintained his income, that tax bill would rise. But he feels
threatened by changes to the non-dom regime.
“When I came to London, it wasn’t because of non-dom status,” he said. “I got
a good job here because the City was the place to be. And it was because you
trusted that things weren’t going to change every day. It’s not a question
of £20,000 or £30,000. It’s because the trust has been broken.”
At the moment, the overarching principle for non-dom taxation is pretty clear:
tax is payable only if money is remitted to the UK. So a non-dom might
accumulate income and capital gains of £1m a year overseas. But if only half
of that money is brought into the UK, then tax is payable only on that half:
the rest escapes as long as it remains offshore.
But the accountancy profession has spotted a way round this. Imagine that the
assets are owned by an offshore trust, not by the individual living in
Britain. And imagine that the trust realises a capital gain by selling some
of its assets. Then, those capital gains can be passed to the individual in
the UK without incurring a single penny of British tax.
The use of devices such as these prompted the Treasury to say rather stiffly
that “the government will amend the current rules to remove flaws and
anomalies that allow individuals . . . to sidestep UK tax, where it is due
on foreign income and gains”.
The lobbying effort to head off any draconian moves that would make big
changes to non-doms’ tax status is well under way. Within days of the
Treasury’s consultation document, Stonehage Group, which advises super-rich
international families, published a paper in which it argued that non-doms
spend at least £16.6 billion in the UK. And, said Stonehage, on top of
income tax, non-doms’ spending probably yielded the Treasury nearly £3
billion in Vat and more than £300m in stamp duty.
Robby Hilkowitz, an executive director of Stonehage, said: “It appears that
the attitude of the Government to international wealthy people coming here
to make a contribution has changed.” Above all, these people dislike
uncertainty, he said. And at the moment, non-doms face plenty of
uncertainty. Even now, with just three months to go to the end of the tax
year, they don’t know what rules they will face in 2008-09.
Charles Lubar, an American lawyer in London with a number of non-dom clients,
said: “If the Government gets this wrong, they risk a haemorrhage of people
from the country. It could destroy the American community in London. There
are people who have built businesses here who could go anywhere in the
world. And there are people who may not work here but spend a serious amount
of money – they have choices about whether they live here or anywhere else.”
Many rich non-doms are simply resigned. A Canadian who has established a
British-based environmental business said: “No, I’m not simply going to
leave in protest. I’m settled here and we have children. But the £30,000 is
in effect a poll tax. There aren’t going to be riots in the streets over
this poll tax because it affects only a small number of people and they are
non-doms, so who gives a damn?
“But I when I retire, I will certainly think about moving. And God knows how
the Government thinks it is going to hold on to rich American bankers.”
Leonie Kerswill, a partner with PricewaterhouseCoopers, said: “I doubt many
people will leave simply because of tax: often they have family ties –
children or elderly parents. But people may think twice about whether to
come here in the first place.”
And that is the conundrum facing Alistair Darling. Just like his predecessor,
the Chancellor has bent over backwards to welcome the young, internationally
mobile high-flyers who have helped to drive the boom in the City over the
past decade. Jean-Pierre is just one of them. Now, the Treasury is guessing
– and it is no more than a guess – that 3,000 people may leave as a result
of tougher taxation of non-doms.
Potentially far more significant is whether the up and coming stars of the
international financial-services industry will find London as attractive as
they have in the past.
Will the City of London continue to have the allure that it held for the likes
of Jean-Pierre 15 years ago?
