Last year, when the International Monetary Fund published a paper on offshore tax havens, it included Switzerland, the Cayman Islands, Jersey, the Bahamas and several other countries where the rich stash their money beyond the reach of grabby governments back home. But there was one surprising new entry on the list: the United Kingdom. The IMF was merely recognizing what wealthy foreigners in Britain have known for years. While British citizens shoulder taxes of up to 40%, residents who weren't born there can take advantage of the nondomicile or nondom rule, which means they're only taxed on income made in or brought into the country. With most of their cash safely tucked away in offshore trusts, foreigners can live in Britain virtually tax free.
"To be honest, I think this system is a little bit crazy," says one French private-equity investor who has lived in London for over 15 years. "It's been a bonanza time for nondoms like Christmas every day." But here comes the Grinch. Spurred on by mounting criticism over what many see as unfair special treatment for rich foreigners, the British Treasury has announced that the fun is over. Along with a new 18% flat rate for capital-gains tax, the government is proposing an annual fee of around $60,000 for any foreigner who lives in the country for more than seven years, and wants the tax man to keep his hands off their non-British assets. Anyone unwilling to stump up that fee will have to pay taxes like everyone else. While the superrich may grit their teeth and accept the $60,000 bill as a minor irritation, it's expected that a significant number of Britain's nondoms won't pay it, and will thus be forced to join the general tax pool. Or they'll leave.
When he announced the changes back in October, Chancellor of the Exchequer Alistair Darling admitted that they might only bring in an additional $1.28 billion a year. But the real issue isn't the money, he said it's that "Everyone who lives and works here should pay their fair share." Raising taxes for those who can't vote might be a canny political move, but economically it may backfire. The Treasury reckons some 3,000 registered nondoms out of a total of 115,000 will pull up stakes when the new rule kicks in on April 6. Britain's wealth managers are more pessimistic, predicting that nondoms will leave in droves, taking billions out of the economy and affecting everything from property prices to spending on luxury goods. The annual fee isn't official yet, and won't be until after Feb. 28 the final day of the "consultation" period in which the Treasury will listen to arguments for and against it. But the consensus is that the law will pass. Already, says Paul Knox, a wealth adviser at JPMorgan Private Bank, "there is a trickle of people who have decided they have to leave. The problem is that a trickle can become a flow. The smart people are always ahead of the curve, and there are some pretty smart people making the decision to move."
Where will they and their cash go? They have plenty of options. Guernsey, Ireland, the Isle of Man, Jersey, Luxembourg, Monaco and Switzerland all boast no or low taxes for expats, and are all less than a three-hour flight from London. Cast the net wider and there are dozens of countries offering perfectly legal perks and breaks to attract tax exiles. There are more than 45 recognized tax havens, holding up to $7 trillion in assets, and these numbers are growing. According to the Boston Consulting Group, the number of households with assets of $1 million or more swelled by 14% in 2006 to 9.6 million, while last year's Forbes Rich List included a record 946 billionaires. Figuring out ways to help the rich stay that way is a lucrative business. Based on GDP per capita, 11 of the world's 20 richest countries are tax havens, with Luxembourg holding the top spot.
On the European Continent, countries with some of the highest tax rates like Denmark, Germany and Sweden sit side by side with those collecting some of the lowest, like Luxembourg and Liechtenstein. That's handy for Europeans who want to work in one country while they live, and save, in another. So execs and entrepreneurs can do business in London while settling in Monaco, the city-state famous for sunshine, glamour and zero tax on income or investment gains. Belgium, where some assets are exempt from capital-gains tax, is peppered with wealthy French escaping a tax rate that can top 40%. And Luxembourg, the euro zone's biggest private-banking center, attracts wealthy foreigners by exempting their investments from tax.