The Wall Street Journal-20080213-Politics - Economics- U-K- Appears To Ease Off On Tax Plan

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Politics & Economics: U.K. Appears To Ease Off On Tax Plan

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LONDON -- Attracting rich foreigners helped fuel the United Kingdom's economic boom. Now, keeping them happy is turning into a political problem for Prime Minister Gordon Brown.

After a public outcry and lobbying from wealthy foreigners, the government appeared to back off some of its plans to tighten tax breaks that have made Britain a magnet for the wealthy from overseas. It said it will stick by its current policy of not taxing income from offshore trusts, a common way for the wealthy to hold assets. And the government won't ask what the trusts hold. The U.S., by contrast, and most other countries tax residents on their world-wide income. Critics said the proposals suggested that they would tax "non-doms," shorthand for nondomicile, on income from offshore trusts whether it is brought into the U.K. or not.

The government said it does plan to press ahead with plans to levy a flat tax for non-doms of GBP 30,000 ($58,500) a year after they have lived in the U.K. for seven years.

Mr. Brown and Treasury head Alistair Darling reversed course after a wave of lobbying by tax advisers and others representing the wealthy. Critics said the government's plan would drive the wealthy to places like Switzerland and Monaco, undermining the status London has built as a premier financial capital.

The government's proposal represented a "climate change" in its attitude to rich foreigners and has left "a lot of people in business asking questions about [the government's] competence," said David Harvey, chief executive of the Society of Trust and Estate Practitioners.

For Mr. Brown, this marks another policy push that hasn't gone smoothly. Since becoming prime minister in June, Mr. Brown has faced the first run on a bank in more than a century, blamed by a parliamentary investigation in part on the government's and regulators' handling, as well as the loss of data on 40% of the population when a computer file was lost in the mail. Proposing greater taxes for wealthy non-doms was an effort to close a gaping budget deficit and boost the government's popularity with voters.

In fact, to many, the government's tax proposals appeared rushed and poorly thought out. Mr. Darling, the Treasury head, laid out the proposals in a speech in Parliament in October, just a week after the Conservative Party had won broad popular support for a series of policy proposals including a GBP 25,000 annual flat tax on longtime non-doms.

By the government's count, just a few thousand of the roughly 115,000 or so non-doms would leave. And because foreigners often come to work in London for postings of only several years, many won't be affected by the changes that kick in after seven years.

"The package will ensure the U.K. remains attractive . . . . We don't think this will damage the success of the City," a Treasury spokesman said.

The government said wealthy foreigners won't be required to disclose the source of income earned abroad, even if they bring it in the U.K., and any tax changes won't be retroactive, according to a copy of a letter from the Treasury to tax advisers. The spokesman said that while various proposals had been put out for public consultation there was no policy U-turn because the government had always intended to leave foreigners' offshore assets alone.

The government plans to continue to field feedback on the proposed changes until the end of the month and expects them to go into effect in April.

Even after the letter was issued, many tax advisers said they were still unclear on the full implications of the government's overhauls.

But some groups criticized the government for moving away from greater taxation for the very rich. Yesterday the Trade Union Congress, a British labor confederation, wrote to Mr. Darling pleading with him to ignore the "concerted campaign from some of the richest and most powerful people in Britain" to skirt taxes.

The tax breaks stem from 200-year-old rules designed in colonial times to give fewer rights, but a lighter tax burden, to subjects of the British Empire who weren't born in Britain.