The UK government doesn’t want to tax “non-doms” because it is afraid of driving them off-shore. Alistair Darling, the new finance minister, repeated as much this week. But do the ministers and officials who are advising them know what they are talking about? Sometimes those who support the tax status for non-doms—foreigners who live in the UK, but are not domiciled there for tax purposes—vaguely suggest they could run off to another tax haven like Switzerland. But in Switzerland, tax exiles do pay some tax.
In fact, the Swiss system could be a useful model for the UK. The country’s non-doms pay a “lump sum” tax. Each year, they are charged the equivalent of what it would cost to rent their homes for five months. So, the bigger their houses, the more they pay. These non-doms may pay less tax than if they stayed in their original countries. But they still pour a decent amount into Swiss coffers. Although there are only 4,221 of them, they contribute 1.3% of direct national tax revenues, according to KPMG.
If the Swiss can get away with charging their non-doms, why can’t the UK? Arguably, London has more to offer the global financial elite than Zurich or Geneva. It has opera, theatre, more buzz—probably greater opportunities to make money. So, why not adopt a “residency tax” for non-doms? One way of doing this would be to base it on rental values, as in Switzerland. Another would be to calculate it as a percentage of the value of their homes. Something like 2.5% would be roughly equivalent and probably do the trick.
So, if somebody had a £1 million (Rs82 million) house, they would pay £25,000. The charge on a real top-notch residence—like that owned by steel magnate Lakshmi Mittal—would be a few million pounds a year.
One advantage of this solution to the non-dom tax break is that it would be relatively easy to police. Houses are very visible and can’t be moved around. It is unlikely to drive many people offshore. The non-doms would still keep all their foreign assets away from the UK taxman and avoid paying capital gains or inheritance tax. And it would probably raise a decent sum of money. The UK had 112,000 non-doms in 2005. If each paid £25,000, the tax take would be £2.8 billion—enough to cut income taxes by just over 2%.
Wouldn’t such a tax drive down house prices? Well, yes. But would that be such a bad thing? High house prices—especially in central London where the non-doms’ tax breaks help crowd out the “doms”—aren’t in the country’s interest.