HSBC Hearing in London
Douglas Flint, chairman of HSBC, and Stuart Gulliver, chief executive of the bank, apologized to a committee of British Parliament for helping clients hide their income from tax authorities.
Video by CNBC on February 25, 2015. Photo by Reuters TV.
LONDON — They are among the British moneyed elite: the head of the nation’s largest bank, a billionaire hedge fund manager and the owner of some of London’s most luxurious nightclubs.
Yet for tax purposes, they are not entirely British.
Thanks to a law from whenBritain had an empire, a growing number of the rich and internationally mobile here do not have to pay tax on their foreign income or assets, only on the money they earn in Britain. They are the “non-domiciled,” or non-doms.
To qualify for that status, they simply need to show that their fathers were born outside Britain and that they intend to someday return to that place. Alternatively, they can choose a new permanent home — Hong Kong with its low tax rate is popular — return to Britain and demonstrate their intention to go back to their new permanent home by, for example, buying a grave plot there or drawing up a local will.
This Edwardian-era tax arrangement has returned to center stage. Questions are being raised as recent revelations that HSBC’s private bank in Switzerland helped clients stash money in offshore accounts reinforce a view that the wealthy play by a different set of rules when it comes to taxes.
“We have a large number of very wealthy people who are using the U.K. as a tax haven,” said Richard Murphy, a chartered accountant and director of Tax Research UK. “There are more non-dom people in the U.K. than there are people living in offshore tax havens like Jersey.”
The number of people with non-dom status in Britain surged to nearly 130,000 in 2008, a 22 percent increase from 2000, after the government introduced an annual tax of 30,000 pounds, or about $46,000, a year on anyone who lives in Britain more than seven years. After several years of decline, the number of non-doms is again increasing.
That has ruffled many in Britain, where non-doms have figured in a national debate over inequality, government austerity and asset bubbles. In London, a flood of foreign money is widely believed to have driven up housing prices and made the city unaffordable for middle-class professionals.
Defenders of the tax policy say that Britain benefits because it encourages wealthy people who have choices about where to settle and spend their money to choose Britain over tax havens such as Switzerland and Dubai.
“It has encouraged rich people to come and live in the U.K. and bring money and spend it here for the general good of our economy,” said Patrick Stevens, tax policy director at the Chartered Institute of Taxation, a British professional body and nonprofit organization.
Most countries use physical presence, or residence, to determine liability for taxes. And many allow foreigners to live and work for a short number of years, paying tax only on the money they make domestically. In the United States, citizens must pay taxes on their money wherever it may be, and foreigners living in the United States are subject to the same rules.
In Britain, the test is not nationality — many non-doms have British passports — but domicile, or where they deem their permanent home to be. Not surprisingly, many have chosen new permanent homes in tax havens like Jersey — Guy Hands, founder of the private equityfirm Terra Firma, moved there — and Switzerland, where Alan Howard, founder of the giant hedge fund Brevan Howard, chose to make his home.
And then there are those who own homes and educate their children here, but claim non-dom status from the good fortune of having a father who was born in say, South Africa or India.
“The system is no longer fit for purpose,” said one lawyer who did not want to alienate his clients by speaking on the record. “A lot of people claim it who have been here a long time and whose links with other countries are pretty weak,” he said.
The origin of the status is rooted in the vestiges of Britain’s empire. In 1914, the chancellor of the Exchequer, David Lloyd George, introduced a budget that would tax wealth anywhere in the world — similar to the system in America today. But an exemption was passed for those in the far-flung reaches of the empire whose wealth might be subject to local taxes. Citizens of Britain, they were “domiciled” elsewhere. Now, they are here, with future plans to settle elsewhere.
“Today’s non-doms are not citizens of the empire; they are citizens of the world,” Richard Brooks, a former British tax inspector and author of “The Great Tax Robbery,” wrote in a recent op-ed article in The Financial Times. “The Edwardian tax break has become a magnet for the ultrarich, from East Asia to the former Soviet republics.”
Details about some prominent British non-doms have emerged in the HSBC files that were leaked recently. They include Stuart T. Gulliver, chief executive of HSBC, and Richard Caring, who lives in a house that has been called the Versailles of Hampstead — one of London’s fanciest neighborhoods — and owns nightclubs in London like Soho House and Annabel’s.
Mr. Gulliver, who was born in Britain and runs Britain’s biggest bank, became a non-dom as a result of his long tenure in Hong Kong and his stated intention to return there to die. Mr. Caring is a non-dom because his father was an American G.I. who settled in London after World War II.
Chris Hohn, the billionaire hedge fund manager and another prominent non-dom, built his business in Britain and his family lives here, but he is a non-dom because his father was born in Jamaica.
A representative for Mr. Hohn did not respond to a request for comment; Mr. Caring declined to comment through a spokesman, although he has said if there is a problem with his being a non-dom, the law should be changed.
Non-doms pay tax on income generated in Britain, as well as any money brought into Britain. This totaled £6.8 billion, including the fees from the levies, in 2011-12, the most recent year for which data is available, according to the law firm Pinsent Masons.
But some non-doms have “dual contracts” that designate a portion of their salary or bonus to be earned abroad at significantly lower tax rates.
Starting in April, the government tax for those staying more than 12 years will go up to £60,000 a year and £90,000 for those staying longer than 17 years. Non-doms lose the inheritance tax benefit after 17 years unless they set up an offshore trust before the 17-year deadline — which most do, say tax lawyers.
Arguments for more restrictions — or a complete overhaul — have gained strength on the back of the HSBC leaks, provided by a whistle-blower to French authorities and passed to governments in 2010. The government has imposed some measures that raise more money from non-doms, including fees on those owning property via offshore companies, a popular strategy for the group, tax lawyers say.
But proponents say that if the exemption is taken away, the mobile elite and their deep pockets will leave and Britain will suffer.
“So much is now tied up in our economy with non-doms that it would be a brave chancellor that decided we don’t need the business anymore,” said Jason Collins, head of tax at Pinsent Masons.
These residents do more than just spend, proponents say. They build businesses here that employ people who pay taxes and they pay taxes on the money they make here or bring into Britain.
Some question the assumptions underlying those arguments. London has rich culture and world-class schools, suggesting that perhaps it does not need to offer tax benefits, too. And many challenge the view that luxury spending actually does trickle down.
“If anything, the linkages between non-doms and the real U.K. economy are very weak precisely because they hold their assets offshore, beyond U.K. taxation, and hence the leakages of revenue outside the U.K. are very high,” said John Christensen, founder of the Tax Justice network and a former economic adviser to Jersey.
The issue of lost revenue irks some. At a recent hearing, the head of Britain’s tax authority, Lin Homer, was grilled on her agency’s performance chasing HSBC clients accused of tax evasion.
Why had France and Spain collected more money from fewer individuals?
“I can only collect the tax that is due,” Ms. Homer said.
“You mean because of non-doms?” asked an enraged member of Parliament.
It was one reason, she conceded.
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