Despite cries of doom that London would be deserted by wealthy non-domiciled people because of the increase in the annual government levy; the rich are flooding into Britain at accelerating rates. Thats signalled by the remorseless rise in high-end London real estate
Eurozone breakup fears and political instabilities in the Middle East and elsewhere, as well as the traditional attraction of London as the defining "world city" are key factors behind the new influx, say UK private bankers.
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Thats far outweighing concerns over the impact of last years Coalition Budget, which provided for the annual charge for non-doms who have lived in the UK for 12 years or more to rise to £50,000 ($78,000) from £30,000 from this coming April.
The existing £30,000 charge is to be retained for those who have been UK resident for at least seven out of the past nine years and fewer than 12 years.
The changes prompted trusts and estates industry body STEP to warn that it could drive non-doms out of Britain – a view echoed by several law and accountancy firms familiar with the non-dom sector. At first sight, these warnings were justified.
In 2008/09, the first year when the levy was due under the Labour government, an estimated 16,000 non-doms left the UK over 10% of the total.
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Increasing international interest
Since then, the reverse has proved true say private bankers, stating the non-domiciled and also "investor visa" business with foreigners have been building up rapidly in the past 12 months.
The wealthy have been looking to secure a base in the UK from a number of countries, ranging from Southern Europe because of eurozone instability, from Russia, Eastern Europe and the Middle East as new Arab Spring democracies have emerged, and from China and India, both countries which are spinning off increasing numbers of super-rich, these bankers say.
"While we have seen some hedge funds make good on their threat to exit the UK for Switzerland or Asia because of the new levy, that has been more than offset by the entry of new wealth," the head of one big London private bank says.
The private banking director at another institution, requesting anonymity, agrees: "Its unreal, there has been a simply huge inflow of foreign money."
London ‘a superb base’
Duncan MacIntyre, head of Coutts Private Office, told Private Banker International: "London remains a superb base for many of the worlds wealthy.
"We see clients from continental and Eastern Europe, Middle East and Asia every day, keen to explore London as a base for their commercial affairs, domestic housing arrangements, childrens education and health needs."
London, with its expertise in these areas, combined with its cosmopolitan nature remains a preferred hub and platform for "the connected, international wealthy with complex wealth needs", MacIntyre adds.
Data on the size of the non-dom market are hard to come by. The Treasury has reported that, in the 2010/11 financial year, some 5,400 claimed non-dom tax status and paid the £30,000 levy. An estimated 120,000 non-doms reside in the UK but escape the levy because they have not lived in the UK long-term.
Important cash cow
Since 2004, non-doms have paid a total £25bn in taxes a valuable source in income for the Treasury and the reason why the wealth advisory industry has repeatedly warned government not to kill the goose that laid the golden egg with repressive taxes.
A number of private bankers say that, in the past year or so, their non-dom business is up anywhere between 10 and 25%. That includes very high-end mortgages for properties from £5m to £10m upwards a lucrative lending sector that growing numbers of private bankers and other financial suppliers are entering.
What has also spurred the influx of the wealthy has been the introduction of investor visas for foreigners. These are a new category of visa introduced in April 2008, enabling high net worth individuals with at least £1m to invest in the UK to enter and remain in the country for three years.
Investor visas on the rise
nvestor visas are seen as a fast-track process for wealthy foreign nationals to acquire British citizenship.
The number of visas issued to wealthy foreigners has rocketed six-fold over the last three years from 43 in 2008 to 320 in 2011, according to analysis by law firm McGrigors.
Applications mostly came from Russian and Chinese nationals.
"Fears that the non-dom levy and the 50p tax rate would deter ultra high net worth foreign nationals from coming to the UK appear to be unfounded," says Yuri Botiuk, a McGrigors partner.
"For these people an annual £30,000 or £50,000 charge is acceptable and most derive the majority of their income from outside the UK, so the 50p tax rate is an irrelevance."
The rules relating to investor visas were changed in April 2011 to encourage more applicants.
Investors will now be able to get indefinite leave to remain more quickly, based on their investments. People investing £5m in the UK can get ILR after three years. People investing £10m or more can get ILR after two years.
The Power of Property
One crude indicator for the buoyancy of the non-dom sector comes from the state of the prime central London residential housing market, which has been booming despite the depression in home sales across the UK.
Ben Stroud, associate director at Jones Lang LaSalle London, said Londons reputation as a safe haven for investors is being reinforced by global troubles, not undermined.
"Additional incentives such as a weak sterling and a favourable tax system are also making it more attractive among a range of potential foreign investors," he adds.
Political drivers
Liam Bailey, Knight Franks head of residential research agrees, saying that economic and even political turmoil have provided the impetus for growth – with "a sharp growth in investors looking for a safe-haven location for at least part of their wealth portfolio".
Prime London property prices finished 2011 up about 13%, according to new research from Hamptons International.
International buyers accounted for 56% of all purchases in the third quarter of 2011. The nationality mix was led by Europeans (20%), followed by Middle East (15%), Far East (10%) and Russians and Chinese (5% respectively).
Provisional figures showed that Russian investors increased their share of luxury-home purchases more than any other group in the fourth quarter, accounting for 16% of transactions in districts like Chelsea and Belgravia, the real estate company reported.
This burst of buying was linked in part with the bid by Vladimir Putin to regain the presidency in March, prompting fears over political instability.
Positive outlook
Ironically, it is the hedge fund industry, which did threaten to defect abroad at one stage, which could help spur London property in coming months. Savills believes that falling bonus pools in the City of London will reduce bankers buying power in the UK housing market this year, with hedge fund managers set to outspend them for the first time.
The alternatives industry could spend as much as £1.5bn on prime property this year, versus the £1bn by City bankers, it is estimated.
The property consultancy said that while banker bonuses were a key factor behind rocketing London house prices in 2006-7, their importance has been overtaken by overseas investors and buyers from the hedge fund and private office industry in the West End.
"Until that point, there had been a strong link between house price movements in the capital and bonus payments, but that link is now broken and the markets dependency on City bonuses is much reduced," Savills said.
International buyers still investing
International investors are expected to retain their position as Londons biggest buyers of prime housing in 2012 with a predicted spend of £4bn as many continue to favour London for its safe haven status, it concluded.
So, how much of a threat has that new £50,000 annual charge actually proved?
"For the really wealthy, its peanuts," one private banking head replies.
"Its the premium they are more than prepared to pay for the lifestyle choice of London, for things like business, entertainment, education for the kids and the proven investment returns on high-class property."
And bankers remain optimistic about the outlook. Dominic OConnell, head of tax, trust and estate planning at Coutts observed that although the remittance basis levy on non-UK domiciliaries is increasing for some individuals, there was a promise in last years Budget of more stability in the "non-dom" tax regime, with no further major changes for the duration of this parliament.
"This should allow non-domiciled clients to plan their future UK tax exposure with more certainty," OConnell noted.
