From The Sunday Times December 16, 2007
Tax changes unsettle Britain¹s nondoms The big hitters who make London a world financial capital say that uncertainty could drive them away
Ben Laurance 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 "nondomicile residents", or "nondoms" people who live in the UK but whose roots are elsewhere. No wonder so many billionaires make their homes in Britain. Of the top 10 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 nondom tax rules. And it is provoking alarm among many of the 110,000 nondoms 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, nondomiciled 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 nondoms 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 nondom status. For some nondoms, £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 nondom 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 nondom 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 nondoms 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 nondom 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 nondom regime. "When I came to London, it wasn't because of nondom 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 nondom taxation is pretty clear: tax is payable only if money is remitted to the UK. So a nondom 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 nondoms' 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 nondoms spend at least £16.6 billion in the UK. And, said Stonehage, on top of income tax, nondoms' 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, nondoms 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 2008-9. Charles Lubar, an American lawyer in London with a number of nondom 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 nondoms 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 nondoms, 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 Price Waterhouse Coopers, 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 nondoms. 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?No wonder so many billionaires make their homes in Britain. Of the top 10 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 nondom tax rules. And it is provoking alarm among many of the 110,000 nondoms living in Britain. Even the likes of Jean-Pierre are considering moving out.
The government recognises that it needs to tread a fine line. ³People from abroad make a significant contribution both to GDP and to UK tax revenues. For example, nondomiciled residents contribute some £12 billion to GDP and £4 billion to income tax alone,² said the Treasury in a consultation paper this month. Put simply, it doesn't want to drive away the nondoms of whom more than a third work in financial services. On the other hand, ³rules applying to people from abroad should operate fairly².
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 nondom status.
For some nondoms, £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 nondom 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 nondom said: ³When you look at it like that, it begins to hurt.²
But for the super-rich, the suggested levy is little more than a flea-bite. Vince Cable, the Liberal Democrats¹ Treasury spokesman and acting party leader, has pithily observed that for someone like Roman Abramovich, owner of Chelsea Football Club, the charge would be ³not much more than a round of drinks at half time at Stamford Bridge².
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 nondoms 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 nondom status.So for the very rich, the £30,000 proposal is small beer. What is far more significant is the Treasury¹s 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 nondom regime.
³When I came to London, it wasn¹t because of nondom status,² he said. ³I got a good job here because the City was the place to be. And it was because you trusted that things weren¹t going to change every day. It¹s not a question of £20,000 or £30,000. It¹s because the trust has been broken.²At the moment, the overarching principle for nondom taxation is pretty clear: tax is payable only if money is remitted to the UK. So a nondom 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 ³the 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 gains².
The lobbying effort to head off any draconian moves that would make big changes to nondoms¹ tax status is well under way. Within days of the Treasury¹s consultation document, Stonehage Group, which advises super-rich international families, published a paper in which it argued that nondoms spend at least £16.6 billion in the UK. And, said Stonehage, on top of income tax, nondoms¹ 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: ³It appears that the attitude of the government to international wealthy people coming here to make a contribution has changed.² Above all, these people dislike uncertainty, he said. And at the moment, nondoms face plenty of uncertainty. Even now, with just three months to go to the end of the tax year, they don¹t know what rules they will face in 2008-9.
Charles Lubar, an American lawyer in London with a number of nondom clients, said: ³If 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.²
Many rich nondoms are simply resigned. A Canadian who has established a British-based environmental business said: ³No, I¹m not simply going to leave in protest. I¹m settled here and we have children. But the £30,000 is in effect a poll tax. There aren¹t going to be riots in the streets over this poll tax because it affects only a small number of people and they are nondoms, so who gives a damn?
³But 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.²Leonie Kerswill, a partner with Price Waterhouse Coopers, said: ³I 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.²
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 nondoms.
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?