Let's Close the U.K.'s Non-Dom Loophole

How to spend your tax break.

Photographer: Chris Ratcliffe

As the U.K.'s general election approaches, Britain's Labour Party has found a nice stick with which to beat Prime Minister David Cameron and the Conservatives. Labour leader Ed Miliband has called for an end to a long-standing tax loophole that benefits the footloose rich.

As well as being popular, Labour's proposal is correct. Non-domicile, or non-dom, status is an anomaly that should have been scrapped years ago. 

The U.K.'s non-dom rules allow people to live and work in Britain while claiming another country as their "domicile." Once granted this status, and upon payment of a fee, non-doms can pay tax only on their U.K. earnings; foreign earnings aren't subject to U.K. taxes unless they're remitted to Britain. 

The vast majority of U.K. residents pay taxes on all their income, wherever it comes from. This goes for most of the rich as well. For non-doms, it's different. They might live in Britain year-round -- might even be British -- yet by establishing a qualifying connection to another country, through inheritance or by other means, they can shelter their foreign income from taxes. 

It's unclear how much additional revenue, if any, the U.K. government would collect by closing the loophole. Non-doms who chose to stay put would pay more, but some would presumably leave for lower-tax jurisdictions. On balance, it's possible the government would collect less tax, not more. And if thousands of wealthy people left London, taking their spending with them, the losses wouldn't be limited to forgone tax receipts. This is the justification the Tories offer for retaining the loophole -- even though the popularity of Labour's plan has persuaded them to make it somewhat smaller. 

All tax systems have to balance efficacy with fairness. The very rich are mobile, so it might be efficient to tax them at lower rates than the less well-off to persuade them to stay put. But such dispensation is also plainly unfair, and most voters won't stand for it. 

A cynic would say that the U.K.'s non-dom status made efficient (i.e. regressive) taxation for some of the very rich politically acceptable by confining it to a narrow group and hiding it behind unintelligible provisions of the tax code. If that's been the case, the game is up. 

And rightly so. Basic fairness is not too much to ask of a tax system, even if it comes at some modest cost. Residents whose incomes and circumstances are identical in all relevant respects should be asked to pay the same tax. It's also right that the very rich pay moderately higher taxes than people whose incomes are lower. Non-dom status violates both principles. 

London is one of the best cities in the world in which to live and work, and it has a lot more going for it than a friendly tax regime for a small number of its wealthiest residents. Ending the non-dom loophole is unlikely to make much of a dent in the exchequer. The risk is worth taking for a tax system that's truly fair.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.