The UK: the world's favourite tax haven

Britain’s unique tax regime is drawing in super-rich foreigners, such as Roman Abramovich (left). What impact is this influx having on the country?

Britain's unique tax regime is drawing in the super-rich like iron filings to a magnet. So what impact is this influx having on the country? Simon Wilson reports

How rich is rich?

The wealth management industry divides the rich into four groups. At the bottom there's the mass affluent' about 4% of the UK population who have more than £150,000 to invest, not counting the equity in their homes. Next there's high-net-worth individuals' 0.7% of the population, or 135,000 people who have at least £530,000 (or $1m). Then come the ultra-high-net-worth individuals', with more than £5.3m ($10m). This group, 0.3% of the population, owns almost half the liquid assets in the UK. Lastly, there are the super-rich' the top 1,000 wealthiest UK residents. According to The Sunday Times Rich List, these people have a total wealth of £300bn. To make it into this level, you need at least £60m.

Are the super-rich all from overseas?

No. At the lower end, the super-rich are mainly British. But at the top-end, the UK's super-rich billionaires are almost all foreigners. The three richest people in the UK, Lakshmi Mittal, Roman Abramovich and Hans Rausing, are Indian, Russian and Swedish respectively. And of the ten richest people in London and the southeast, just one, Richard Branson, is British. There are two main kinds of mega-rich: global entrepreneurs who choose Britain as a great place to locate their businesses; and tax exiles from continental Europe, especially Scandinavia. London's popularity among the global elite is increasing. Private Banker International says that by last year there were more dollar billionaires living in London than in any other city 44 against New York's 34 and Moscow's 21.

Why do they like London so much?

According to the compiler of The Sunday Times Rich List, Philip Beresford, London is "home to every footloose billionaire who wants access to the best financial markets, speed of communication, personal safety and a sophisticated infrastructure of shops, entertainment and good schooling".

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All of these play a part as does the political stability that has drawn the rich to London since at least the 19th century.

But the UK's big attraction for the global super-wealthy is tax avoidance. David Harvey of Step the Society of Trust and Estate Practitioners, a global association of tax lawyers and advisers to the mega-rich says that more and more of the world's richest people are choosing to live in London. Why? "Because if you are looking to avoid tax legally, you are as well going to London as anywhere else."

Why is that?

Because the UK has a unique tax regime that is unusually friendly to foreigners who live here but are not domiciled' here for tax purposes. Domicile is a rather uncertain (and much misunderstood) concept that has its roots in Britain's colonial past and is different from nationality or residence. In essence, your domicile is the country you consider to be your permanent home and is usually based on your country of birth and your father's domicile. During the Napoleonic Wars, when income tax was first introduced in 1799 to fund the fighting, Britons living (domiciled') in the colonies won an exception from the tax; they could keep earnings made on their plantations tax-free, but only if they didn't bring their earnings back to Britain. The same principle survives more or less intact today, allowing non-domiciled' British residents including tens of thousands of wealthy foreigners to avoid tax on all overseas earnings.

Is this fair?

It might not look fair to British billionaires who had the misfortune to be born here and pay tax on assets worldwide. Some would also argue that letting a super-class of plutocrats flourish within British society is a bad thing in itself, as it increases social inequality and puts stress on social cohesion. From this perspective, it is possible to argue that it's the well-off middle-classes who should be particularly angry at the tax-dodging super-elite. After all, they are paying the taxes that the very wealthy avoid. On the other hand, many economists would argue that Britain gains more from its overseas rich than it loses.

What do we gain?

First, we get jobs everything from housekeepers to investment management. The huge range of financial activity associated with the very rich spreads through the economy, and helps explain why inner London is Europe's wealthiest area, with more jobs paying more than £1m a year after tax than the rest of the continent put together. Second, says economist Hamish McRae, we get skills: the mass of talent attracted to the UK should help it keep its place as a top-end service provider for at least another generation. Third, we gain international influence. Because global talent chooses to locate here for a time, Britain will have a global network of friends in high places in the future.

Monaco: a commuter capital for rich Brits

Tax rules from the steamship age have led a generation of Britain's super-rich to commute to work from tax-haven Monaco. The Guardian reports that more than 650 directors of UK firms give Monaco as their address, as hedge-fund managers and property developers join long-term residents such as Philip Green and Stelios Haji-Ioannou. The crucial tax loophole allows non-residents (and non-taxpayers) to spend 90 days a year in the UK, not counting the days of arrival and departure. So if you fly in on Monday and out on Thursday night, you have spent only two tax days in the UK and you can do this for 45 weeks of the year. Since 1993, you can even have a home in the UK and not lose your non-resident status.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.