Mark Davies joins the debate in The Financial Times today:-
Flight of the non-doms? by Harriet Agnew
Wealthy beneficiaries say they will leave the country if Britain revamps a special tax status
The Boltons in the royal borough of Kensington and Chelsea is one of the most exclusive addresses in London, yet in this street and two neighbouring roads, four times as many £15m-£25m mansions are for sale than is usual.
The 12 listings reflect a slowdown in the previously red-hot luxury property market. The number of central London properties fetching more than £5m in 2015 fell by a third on the previous year, according to LonRes, a research company. This year is set to be worse. Morgan Stanley, the financial services firm, has forecast that the price of new upmarket flats in the UK capital could fall by a fifth this year.
Experts cite several reasons — changes to stamp duty, concerns about a possible UK exit from the EU and suggestions that the housing market is overheating. And, according to Charles McDowell, a buying agent for prime properties, there is another factor: a looming change to a special tax status for residents known as non-doms.
“Foreign buyers are not buying in the numbers that they were because of uncertainty and lack of clarity around the changes to the non-dom regime,” says Mr McDowell.
The slowdown is just one sign of the anxiety among UK residents with non-domicile tax status. The changes were set in motion in July when chancellor George Osborne unveiled an overhaul of a system in place since 1799 — when William Pitt the Younger was prime minister and Britain was fighting France.
The regime was created in part to shelter those with foreign property from wartime taxes. It has meant that, for more than 200 years, individuals claiming non-dom status have been able to live and work in Britain without being subject to tax on gains and income earned and kept outside the country.
The Conservative government has declared that the rules can give rise to “unfair outcomes”, and Mr Osborne has set out to overhaul them. On the face of it, it seems like an odd thing for a Tory government to focus on. But Mr Osborne, sensing voter concerns about inequality, has taken one of the flagship policies of the opposition Labour party and made it his own. More details could be outlined in next week’s Budget.
The big question is whether non-dom reform will lead to the flight of some of Britain’s wealthiest individuals — many of whom claim to be significant job creators — and how that could affect the UK’s fragile economic recovery.
Those whose livelihoods depend on custom from non-doms say an exodus has already begun. “Seven out of 10 non-doms are leaving this country,” says Trevor Abrahmsohn, director of Glentree Properties, a London estate agent. “They’re selling their businesses, selling their properties and selling their cars. We are losing wealth creators who contribute a huge amount to the richness of this country.”
Others are less certain, noting that similar warnings ahead of a 2008 reform effort did not materialise.
Boost to London
Non-dom status has been part of the cocktail of attractions that has contributed to the internationalisation of London. The city competes with New York, Hong Kong and others to capture the wealth and brains of the mobile elite.
Asia has been a magnet for western wealth in part for tax reasons. Hong Kong levies a rate of about 15 per cent and there is no tax on offshore earnings brought in to the territory. By contrast, the US taxes residents on global income.
In the 2013-14 tax year, 114,300 non-doms were registered in the UK. The group ranged from relatively low-paid workers such as teachers to prominent businessmen like Lakshmi Mittal, the steel magnate, media baron Viscount Rothermere and Roman Abramovich, owner of Chelsea football club.
Under Mr Osborne’s proposals, foreign residents who have lived in the UK for more than 15 of the past 20 years will be deemed domiciled in the UK for the purposes of income tax, capital gains tax and inheritance tax fromApril 2017. They will have to open their international business affairs to the scrutiny of HM Revenue & Customs, which could land many of them with a vast tax bill.
The government has said that previously established offshore trusts will be protected but details of their treatment have been deferred until the 2017 finance bill, which non-doms say makes it difficult for them to plan their affairs.
Mr Osborne is changing the balance of personal taxation at the same time as pressure builds for a crackdown on aggressive tax avoidance by global corporations. Critics of the non-dom regime argue that it is unfair and has distorted London’s property market.
“It’s the perceptions that matter here,” says Richard Murphy, a tax campaigner and professor at City University, London. “It’s about inequality of treatment rather than inequality of wealth. The fact that someone who lives in the UK can pay less tax as a result of the accident of where they were born is blatant discrimination.”
Even people who see the benefit of non-dom status appreciate why the regime might be perceived as offering an unfair advantage. “Osborne is trying to make the system more fair,” says Johannes Huth, head of KKR’s European operations. “I don’t think the new rules will increase government revenues because it will mean that a number of people will change their tax planning, but politically it’s tough to argue that it’s not the right thing to do.”
Quirks of the regime mean that even someone born in the UK can inherit a foreign domicile on the father’s side and claim non-dom status. Zac Goldsmith, the Conservative MP and London mayoral candidate, was a hereditary non-dom until 2009. Britons can also become non-doms if they leave the country to work abroad and return “temporarily” — a path taken by John McFarlane, chairman of Barclays, and Stuart Gulliver, chief executive of HSBC.
Critics of the rules argue that they allow foreigners who have benefited from living in the UK, or even those born in the country to a foreign father, to pay significantly lower levels of tax compared with other residents — and relative to their means. They add that wealthy foreigners have turned much of London into a playground for the super-rich that is inaccessible to all but the highest earners.
Django Davidson, a partner at London asset manager Hosking & Co, says London has become a twist on Somerset Maugham’s description of Monaco as “a sunny place for shady people”.
“London has become a rainy place for shady people,” he says. “The business model of laying out the red carpet to a highly mobile international elite may turn out to have been a little short-sighted, given that young people are now priced out of much of central London property.”
Competitive advantage
Proponents of the non-dom regime say it has given London a huge competitive advantage. They argue that it has created jobs by encouraging everyone from shipping magnates, industrialists and property entrepreneurs to use the UK as a base to build their businesses.
Mike Walker, a partner at KPMG, points to one non-dom who employs more than 2,000 people in Britain. “None of these jobs would have been created if he hadn’t chosen to build his business here,” he says. These individuals and their staff boost the UK’s coffers through taxes on income and consumption, and many of them are active philanthropists donating to British universities and institutions like the Tate Modern, the Southbank Centre and Serpentine Galleries. Although these non-doms do not pay tax on their offshore earnings, they are taxed on their UK income and bring skills, jobs and investment to Britain.
In 2013-14 non-doms paid £6.6bn in income tax in Britain, up 7 per cent on the previous 12 months, according to law firm Pinsent Masons.
“My feeling is that the revenue the non-dom regime creates is enormous,” says Mr Walker. “There is a waterfall effect that trickles through the income tax and national insurance that these very wealthy non-doms and their employees pay, as well as VAT from the money they spend in shops, restaurants and on other services.”
Many who will be affected by the changes see Mr Osborne’s move as short-sighted and populist. “This is a useless tax move that does nothing for redistribution,” says a foreign banker who has lived in London for more than two decades. “To tackle the perceived unfairness of the system, change the rules that enable British-born individuals to inherit non-dom status [but] don’t discourage those who have chosen to bring their business here.”
Critics of the reforms warn of unintended consequences. Far from raising revenues, they say the proposed changes will result in a “negative tax yield”: an ensuing flight of talent and cash from the UK that will leave the exchequer worse off.
Conversations with members of some of London’s richest foreign families and their advisers reveal that they are making plans to leave London for Monaco, Switzerland, France, Israel, Spain, Portugal or Dubai. These people, many of whom have lived in London for decades, represent sectors including shipping, steel, property, manufacturing and finance. KPMG’s Mr Walker says: “If in reforming the system, you drive away people with deep pockets you’ve arguably created another problem.”
Internationally mobile
To access the tax advantages, non-doms must pay a levy called the remittance-based charge, which is set at £30,000, £60,000 or £90,000 depending on the length of residence.
The bulk of the UK’s non-doms opt not to use the special status because their foreign earnings are not high enough. In 2013-14, only 5,000 people opted to pay the levy to keep their foreign earnings out of the UK tax net. They paid a total of £223m in remittance-based charges.
“If one of these people leaves, that’s the equivalent of 25 average taxpayers,” says Mark Davies, a tax adviser.
The 5,000 remittance taxpayers paid £4.91bn in income tax on their UK earnings in 2013-14 — three-quarters of the £6.6bn total paid by the 114,300 non-doms, according to a freedom of information request by Mark Davies & Associates. This is money the Treasury would lose if these people moved their primary domicile out of the UK.
“A lot of these people are very internationally mobile anyway and have business interests all around the world,” says Fiona Fernie, a partner and head of tax investigations at Pinsent Masons.
“For some of them it could mean a small tweak to their lifestyle — a change of three or four weeks a year — to get them out of being a UK resident and resident in another jurisdiction.”
Many are already putting their plans into action. “Anybody who has big enough assets overseas will walk away,” says one non-dom who employs hundreds of people in the UK and is making arrangements to leave. “Everybody who I know is walking.”