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When I spoke this week with Christopher Groves, a London-based tax lawyer who advises the wealthy, he was sitting in the Milan office of his firm, Withers. It wasn't a coincidence. While the UK has been steadily reducing tax breaks for highly paid “non-residents”, such as bankers, Italy is attracting them by offering “empty London” to foreign residents.
Move to Italy (or come back after being away for nine years) and not only will you get to sample its food, sunshine and drinks, you'll save a lot of taxes if you're wealthy. A new resident can pay a flat tax of €100,000 per year on any foreign income and assets for up to 15 years. For a successful businessman or high-income professional in the city, this is a tempting offer.
The mood in London is more somber. Labour, which is likely to form the next government, this week announced further restrictions on benefits for 68,800 non-residents who paid £8.5bn in personal tax in 2021-22. That's a lot, but Rachel Reeves, Labour's shadow chancellor, revealed the party's plans in a press release headlined: “I will take on tax dodgers to fund our NHS.”
The “evaders” part refers to other tax evaders and not to non-residents, but who reads beyond the headline? In any case, this is typical enough of the popular British attitude towards non-residents and foreign residents enjoying tax advantages since the financial crisis of 2008-09. In difficult times, with budgets stretched and public services strained, any tax leniency seems like an exasperation.
The non-resident system itself is indefensible: even Groves, who has advised many of the beneficiaries, called it “ridiculous”. In 1914, Chancellor David Lloyd George exempted “a citizen of the Empire who… is not domiciled in this country” from global taxation. The definition of “non-resident” is ambiguous and can include UK citizens whose parents live in other countries.
So it is true that his Conservative successor, Jeremy Hunt, announced in his budget in March that the system would be abolished and replaced with a residence-based test. From 2025, new residents can avoid all taxes on foreign income and capital gains for four years, with no Italian-style annual fees. After that, they will have to fall in line with the rest of the UK taxpayers.
Labor broadly agrees with this idea: indeed, Hunt took his lead from a proposal put forward by Reeves last year. She now hopes to raise taxes by closing what she calls “loopholes”, including a tougher inheritance tax policy that scares away some non-residents, because the UK rate is high by global standards. But it is accepted wisdom that residency is a better test than domicile.
This leaves a practical question: Will non-residents effectively resign themselves to paying higher UK taxes? Golden geese can fly away to Italy, Switzerland or other places that offer more vacations. There are many reasons to stay in the UK, from private schools to the culture and cosmopolitan atmosphere of London, but it would be strange for these people to ignore financial incentives above all else.
It all depends. A young banker who works in the City for a few years will be reckless, but the same person will be reluctant to leave a few years later, having met a partner, had children and settled down. Relatively few non-residents have left the UK solely because of previous tax changes, according to Arun Advani, a professor at the University of Warwick who studies them.
But departures are not the only worry: a well-designed system should still attract wealthy foreigners, or Britons who have lived abroad for a decade and want to return. The UK cannot afford to lose a lucrative source of taxes by deferring them entirely. It has already seized its opportunity with the impact of Brexit on the City of London, and the rhetoric, if not the reality, of hostility to immigration.
This is a matter of principle as well as a practical matter. The antiquity and strangeness of the non-resident system has unfairly discredited many individuals who bring energy, enterprise as well as wealth. Now that the crisis is over, the UK needs an alternative that not only appoints successors but provides the incentive to stay on long enough to integrate financially.
Four years without having to pay any tax on foreign income or foreign assets seems to me at once too short and too generous. Italy's €100,000 annual fee is fairer, but 15 years is too long. Once someone stays for seven years, they probably won't leave: give them enough time to become emotionally and physically attached, and play bingo for the benefit of the closet.
Of course, the influx of wealth can cause difficulties. Spain has suspended the “golden visa” program for non-EU citizens who buy real estate due to rising prices, and Italy is facing similar pressures. But these are the problems of success and the UK economy can cope with more of these problems. London has a proud history as a financial hub, and Milan is stealing the action.
It is long past time to end the outdated residency system, but new residents who love the country and pay a lot of taxes should be welcomed. If the UK applies its new rules correctly, it will end up contributing more.
john.gapper@ft.com
