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U.K.’s $166,000 Millionaire Tax Raid May Be Parried

Chancellor of the Exchequor George Osborne
Chancellor of the Exchequor George Osborne may not see the extra money due to tax avoidance and emigration. Photographer: Nelson Ching/Bloomberg

The British government aims to deduct an additional 106,000 pounds ($166,000) from resident millionaires. Tax avoidance and emigration mean Chancellor of the Exchequer George Osborne may not see the extra money.

A British resident earning 1 million pounds a year with a non-working spouse and two children will pay an extra 106,462 pounds more in tax in 2013 than in the 2009-2010 fiscal year, according to a study for Bloomberg News by Grant Thornton U.K. LLP. Almost 80,000 pounds of this is attributable to the 50 percent top tax rate introduced this year, while the rest relates to new government limits on pension contributions, the withdrawal of child benefit payments and other taxes.

“The more you tax, the less revenue you get,” said Robert Hiscox, who earned 1.1 million pounds in 2009 as chairman of Lloyd’s of London insurer Hiscox Ltd. “I’m using more devices to reduce my income and increase my capital gain. Tax avoidance is completely legal.”

Osborne and Prime Minister David Cameron have added to the previous Labour government’s squeeze on top-rate taxpayers by reducing pension tax breaks by four-fifths and increasing mandatory employee social insurance contributions. They say the measures, including the biggest cuts in welfare spending since 1945, are fair and will reduce Britain’s budget deficit to 2 percent by 2015 from more than 10 percent.

Tax rates in London are more punitive than in any of the world’s other major financial centers including New York and Hong Kong, according to a study by KPMG published in January.

London ‘Least Preferred’

“Those on the highest income are being hit hardest,” said Mike Warburton, a tax director at Grant Thornton, the U.K.’s fifth-biggest accountancy firm, who helped compile the research. “There must be a risk that entrepreneurs will decide that there are better places to earn a living than the U.K.”

London is the “least preferred” location for directors who have a choice, Standard Chartered Plc Chief Executive Officer Peter Sands told London’s Times newspaper last month. HSBC Holdings Plc and Barclays Plc have threatened to quit the U.K. if a government-sponsored commission next year decides they should separate their consumer and securities units.

There’s “not just a realistic chance of it happening, it is happening,” said Ian Scott, regional head of financial planning at Arbuthnot Latham, a 177-year-old private bank based in London. “People are going. To an extent a lot of them have already gone.”

Swiss Tax Vote

Swiss voters will decide this weekend whether to introduce new tax rules for the nation’s top earners, risking the country’s reputation as a low-tax refuge for well-paid and wealthy residents.

Hedge funds including Brevan Howard Asset Management LLP and BlueCrest Capital Management Ltd. have both opened offices in Geneva this year. WPP Plc, the world’s largest advertising company, Shire Plc and United Business Media Ltd. all moved their tax domicile to Ireland from London in 2008.

Those who stay in Britain, such as Hiscox, are choosing other ways to avoid tax, despite the government’s efforts to raise an extra 7 billion pounds a year within five years by clamping down on tax evasion, which is illegal, and tax avoidance, which isn’t.

“It’s my ambition to prove the Laffer Curve,” Hiscox, 67, said, referring to economist Arthur Laffer’s 1974 theory that tax receipts fall as governments raise taxes on the rich. “Income at 40 percent tax is quite painful. But losing 50 percent, plus all the other taxes -- it becomes onerous and less attractive to get income.”

Capital Gains

Hiscox plans to take more of his earnings as capital gains, which are taxed at as much as 28 percent. This can be done by choosing to invest in company share-option plans rather than being paid in cash, according to Patrick Stevens, a tax adviser at Ernst & Young LLP in London.

Other techniques include moving assets to a lower tax-paying spouse and sheltering money in Enterprise Investment Schemes, said Arbuthnot Latham’s Scott. EIS encourage savers to invest in growing U.K. companies in return for income and capital gains tax breaks.

“The feeling of a lot people is they want to be efficient with their tax planning, they don’t want to be aggressive,” he said. “When markets are roaring away and people are feeling flush they tend to go for the more esoteric offshore stuff. People now realize the Revenue is playing hardball.”

Last year there were about 242,000 British millionaires, according to the Centre for Economics and Business Research Ltd., a London-based research group. That figure was less than half the 489,000 estimated in 2007 because of the fall in property prices during the recession, the CEBR said.

Hidden Money

Danny Alexander, chief secretary to the Treasury, said in September he would devote 900 million pounds to help Her Majesty’s Revenue & Customs, the U.K. tax authority, to find money hidden offshore and to target those seeking to avoid the 50 percent tax rate applied to those with annual incomes above 150,000 pounds.

Despite the rising tax rates, Hiscox said he’s had no plans to move abroad since the 1970s, when the highest rate of income tax was 83 percent. Margaret Thatcher, who became prime minister in 1979, lowered the rate to 60 percent. It was later lowered to 40 percent.

“It’s so funny that at the end of my career that tax is going up, we’ve got an anti-business atmosphere and the country’s being run incredibly badly with a huge debt,” Hiscox said. “It’s just how it was in the ‘70s. It’s rather sad that I’m beginning and ending in the same atmosphere.”

Tax survey details:

Married couple, one earner, two children Income 1,000,000 pounds
(salary 500,000 pounds plus bonus 500,000 pounds)
Pension contribution 80,000 pounds (16 percent of salary)

Tax changes (increases in tax)

2009/10 to 2010/11
Introduction of 50 percent tax rate        -77,000 pounds
Withdrawal of personal tax allowance        -2,590 pounds

Change from 2009/10 to 2010/11 tax year   -79,590 pounds

2010/11 to 2011/12 1 percent increase in National Insurance   -9,620 pounds Basic tax rate band reduction (2,500 pounds) -500 pounds Pension annual allowance charge         -15,000 pounds

Change from 2010/11 to 2011/12 tax year   -25,120 pounds

Jan. 2013 onwards Withdrawal of child benefit -1,752 pounds Total change                             -106,462 pounds

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