U.K. Tax Haven Dead?

Yet another example of the beneficial impact of international tax competition may see a major shift of the wealthy from London to Switzerland and/or Monaco.

When the British Labour Party first won power in 1994 one of now Prime Minister Gordon Brown's pledges was to close the so-called "non-dom loophole" when Labour came to power.

The non-dom loophole refers to a provision in United Kingdom tax law that, until now, has made it a major tax haven, but with a different twist -- the U.K. gives major tax breaks to wealthy foreigners who actually make their home there. Under the law, anyone living in Britain and not born there simply can choose the non-domiciled tax status and thereby escape almost all income taxes. The tax break was originally formulated in 1799 to help British colonialists avoid tax on their overseas income.

That means scores of billionaires living there only pay tax on the relatively small amount of money they bring into the U.K. each year. They do not pay U.K. taxes on their much larger worldwide earnings. This has made London a tax haven for everyone from Russian oil tycoons to thousands of international investment and hedge fund bankers. The country now has 68 billionaires - three times as many as four years ago. Only three of its 10 richest people were born in Britain. A current estimate of 150,000 to 200,000 non-doms for 2007 is “entirely reasonable” says one expert.

Wealth Tax

But now the Labour Party, egged on by the so-called "Conservative" Party, is considering imposing an annual minimum tax on all foreigners in the U.K. who claim non-dom status -- a fee of £30,000 (US$62,000). Cato Institute tax expert Dan Mitchell suggests that higher U.K. taxes would result in a major shift of economic activity to Switzerland.

According to the The Times of London, lower tax  Switzerland would welcome the opportunity to make their system more attractive to the British financial services industry who well may want to move. The Labour proposal would exclude those who have lived in the U.K. for less than seven years. This is so a not to scare away the many hundreds of bright foreign bankers who come to the City for a few years and then go elsewhere. But experts says the new fee effectively raises the tax paid by a U.K. private equity or hedge fund manager on his investments from 10% to 18%.

The Labour Party pro-tax shift is attributed partly to embarrassments over millions in non-dom Labour political fund donations and the International Monetary Fund’s designation of London as a de facto tax haven.

But even talking tough on non-doms remains risky. Hedge fund managers have only to move to Zurich and the new tax may result in a big net loss to the Exchequer. “The Monaco property market is booming,” a leading real estate agent mused, referring to that tax haven for the wealthy. “These people already feel on safer ground there.”