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When I spoke this week to Christopher Groves, a London-based tax lawyer who advises the well-off, he was sitting in the Milan office of his firm Withers. It was not a coincidence. While the UK has steadily curbed its tax breaks for highly paid “non-dom” residents such as bankers, Italy is attracting them with a svuota-Londra (“empty London”) offer to foreign residents.
Move to Italy (or move back once you have been away for nine years) and you can not only savour its food, sunshine and sprezzatura, but save plenty on taxes if you are wealthy. A new resident can pay a flat tax of €100,000 a year on any foreign income and assets for up to 15 years. For a successful entrepreneur or high-earning City professional, that is an enticing offer.
The mood in London is grimmer. Labour, which is likely to form the next government, this week announced further curbs on perks for the 68,800 non-dom residents who paid £8.5bn in personal taxes in 2021-22. This is a lot but Rachel Reeves, Labour’s shadow chancellor, unveiled the party’s plans in a press release headed: “I will take on the tax dodgers to fund our NHS.”
The “dodgers” part referred to other tax avoiders and not to non-doms, but who reads past the headline? In any case, it is typical enough of the popular British attitude towards non-doms and tax-advantaged foreign residents since the 2008-2009 financial crisis. In tough times, with budgets stretched and public services strained, any tax leniency feels like an outrage.
The non-dom regime itself is indefensible: even Groves, who has advised a lot of beneficiaries, calls it “ridiculous”. In 1914, the chancellor, David Lloyd George, exempted “the citizen of the Empire who . . . is not domiciled in this country” from global taxation. The definition of a non-dom is nebulous and can cover UK citizens whose fathers live in other countries.
So it is right that his Conservative successor Jeremy Hunt announced in his March Budget the abolition of the regime, and its replacement by a residence-based test. From 2025, new residents can avoid all tax on foreign income and capital gains for four years, without any Italian-style annual charge. After that, they will have to muck in with the rest of us UK taxpayers.
Labour broadly agrees with this idea: indeed, Hunt took his lead from a proposal that Reeves made last year. It now hopes to raise further tax by closing what it calls “loopholes”, including a tougher inheritance tax policy that frightens some non-doms because the UK’s rate is high by global standards. But it is accepted wisdom that residence is a better test than domicile.
That leaves a practical question: will non-doms actually submit to paying higher taxes in the UK? The golden geese could fly away to Italy, Switzerland or other places that offer more breaks. There are many reasons to remain in the UK, from private schools to culture and London’s cosmopolitan vibe, but it would be strange for these people above all to ignore financial incentives.
It all depends. A young banker who is working in the City for a couple of years will be flighty, but the same person will be reluctant to leave some years later, having met a partner, had children and settled down. Relatively few non-doms left the UK solely due to previous tax changes, according to Arun Advani, a Warwick university professor who studies them.
But leavers are not the only worry: a well-designed regime should carry on attracting wealthy foreigners, or Britons who have lived overseas for a decade and want to return. The UK cannot afford to lose a lucrative source of tax by putting them off entirely. It has already taken its chances with Brexit’s effect on the City and the rhetoric, if not reality, of hostility to immigration.
This is a matter of principle as well as practicality. The antiquity and oddity of the non-dom regime has unfairly tarnished many individuals who bring energy and enterprise as well as wealth. Now it is ending, the UK needs to have a replacement that not only recruits successors but provides an incentive to stay long enough to integrate financially.
Four years without having to pay any tax on foreign income or assets strikes me as simultaneously too short and too generous. Italy’s €100,000 annual charge is fairer, but its 15-year period is overlong. Once someone has stayed seven years, they are probably not leaving: give them sufficient time to become emotionally and physically attached, and bingo for the Treasury.
An influx of wealth can cause difficulties, of course. Spain has halted its “golden visa” programme for non-EU citizens buying property because it raised prices and Italy faces similar strains. But these are problems of success and the UK economy could do with rather more of the latter. London has a proud history as a financial entrepôt and Milan is stealing its action.
It is long past time to end the outdated non-dom regime, but new residents who like the country and pay a lot of taxes should be welcomed. If the UK gets its new rules right, they will end up contributing even more.