A British Tax Break in Need of Fine-Tuning
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Version 0 of 1. Britain’s so called non-dom system gives some rich people what appears to be an unfair tax break. If they count as being “domiciled” abroad, they can pay the British authorities tax on income generated only in the country, even if they live there permanently. Other British residents have to pay tax on their global incomes. The opposition Labour Party, which could be in power after the May 7 general election, has seized on this anomaly and said it would abolish the non-dom status. It says it thinks this move would raise hundreds of millions of pounds in extra tax. The Labour politicians are onto something. But the fairness case is not quite as crystal clear as Ed Miliband, the party’s leader, makes out. There is also a risk that abolishing the non-dom status could drive some people who benefit the economy out of Britain. Fortunately, there is a middle ground that would tackle unfairness but not throw the baby out with the bath water. First, though, some explanation about the meaning of this tax status. Being born abroad is normally enough to make a person qualify as a non-dom. If you are born in Britain to a father (but not a mother) who is himself a non-dom, that will also usually do. It may also be possible to be born in Britain, spend time abroad and then return to Britain and be classified as a non-dom — provided you can argue persuasively that your real home is elsewhere. The main tax break non-doms get is the ability to pay Britain tax on their Britain-generated income only — plus any income brought into the country. If they have lots of foreign income, this can be an attractive perk. There are 47,000 non-doms who have elected to take advantage of this privilege. If they have been living in Britain for less than seven years, as nearly 90 percent of them have, they do not pay for doing so. But about 5,000 have lived there longer. These pay an annual fee starting at 30,000 pounds, or about $44,000, and rising to £90,000 if they have been residents for 17 years or more. Now look at the issue of fairness. It is hard to see why people who are born in Britain and living there should be able to avoid tax on their foreign income. The idea of inheriting non-dom status from one’s father is nonsense. It also seems unfair for people who have moved to Britain and have been living there for a long time, say more than 10 years, to enjoy these perks. But what about those who go to Britain for only a short time? It does not seem fair to tax these people on their global income. The Labour Party has said there would be an exception for people in Britain on a temporary basis. It would consult on the details of what exactly should count as temporary but has suggested a maximum of two or three years. This seems reasonable. But what about those in the middle ground — those who have been living in Britain from three to 10 years? The fairness case for taxing this group is not clear. They are somewhere in between temporary and permanent residents. The risk of removing their non-dom status is that some would leave and others who might be attracted to Britain might not bother coming in the first place. Some Britons might say this would be no bad thing. They criticize rich non-doms for pushing up housing prices in central London and flashing their cash ostentatiously. While there is some validity in these criticisms, non-doms also bring benefits. They generate nearly £9 billion in taxes. What is more, the money they spend in Britain — and some are really big spenders — generates employment and more tax. Labour thinks abolishing the non-dom status would raise money because such people would have to pay tax on their foreign income too. But if some of the richest quit the country, the measure could actually cost money. Among people who have lived in Britain more than a decade, not many will leave, because their roots will be deep. But those in the three-to-10-year range could be vulnerable. It would therefore be sensible to offer them some intermediate deal. One option could be to allow this group to continue to avoid tax on their foreign incomes provided they pay a fee that varies with the value of their British residences, say 1 percent each year, with a minimum of £30,000. Such a charge would raise more money than the current fee — both because it would, for the first time, hit people who had been living in Britain for less than seven years and because really rich non-doms would pay much more than they currently do. An oligarch with a £100 million residence, whether he owned it or not, would pay £1 million. But such a system would not drive people away. After all, for an oligarch, £1 million a year is peanuts. If Labour wins the election, it should modify its plans in this way. If the governing Conservative Party hangs onto power, it should adopt such a policy too. Hugo Dixon is editor at large of Reuters News. |