We took the train out to Luton Airport this morning. Standing on the platform at London Bridge Station we watched the early morning trains come in. Out of them came the working classes, people who wear jeans and watch caps and start work early on construction sites, in restaurants and hotels, and in the few other manual jobs that remain in the city center. Later trains bring in a different class of worker… dressed in suits and ties, who walk across the bridge to the City, London’s equivalent of Wall Street, and spend their days separating clients from their money. Millions of people come into the town center each day… “I did not think death had undone so many,” remarked T.S. Eliot, watching them make their way over the Blackfriar’s Bridge.
The center of town has become so expensive that few real Londoners can afford to live there. Instead, there are working foreigners, such as your editor, rich Arabs, Russians, French, Indians – all manner of flotsam and jetsam from the globalised, capitalist economy.
England has a tax rule, dating back some 200 years, that allows these foreigners to live in the U.K. and pay tax only on the money they earn in the country or bring into it. If, for example, a Russian energy billionaire chooses to live in London, his earnings from Russia are tax-free here. Naturally, this little feature… along with London’s financial industry and its civilised, law-abiding society… attracts many of the world’s rich and footloose.
Envy is a more potent emotion than the desire for wealth itself. Many people in the United Kingdom are annoyed that so many rich people live in their midst without paying taxes. “It’s not fair,” they say, “that we have to pay thousands in taxes on our meager salaries, while they earn billions and pay nothing.” They have a point. It’s not fair. But it might be smart. Clearly, the rich spread their money around. They fill the fancy restaurants… buy the expensive cars… go to the theatre. They buy property too… lifting the ceiling on the London housing market to the highest level in the world. They also spend enormous amounts of money in England’s equivalent of Wall Street – the City.
They have money to manage and invest… they do mergers and acquisitions… the keep the clerks busy. They keep the high-priced lawyers busy… the dress-shop girls on alert… and the jewelry companies hoping for a big sale. (Last year, celebrating an important birthday, we bought Elizabeth a very little bauble at Tiffany’s on Sloan Square. Now we are on the mailing list and treated as though we were an oil prince.)
Americans, of course, are in a class by themselves. Unlike the world’s other peoples, the land of the free taxes its own on their worldwide wealth – no matter where they live or how long they’ve lived there. We have lived outside the United States for the last 12 years. Yet, every one of those years we filed our U.S. tax return and paid our taxes to the U.S. government – just as if we got something for it.
Curiously, this regime often works to Americans’ interest. An American in Paris, for example, who earns his money in the United States, probably pays less in tax than any other group in the city. A special treaty between the United States and France permits U.S. citizens – and only U.S. citizens – to discharge their entire French tax obligation on U.S. source income simply by paying IRS what is owed.
But the non-U.S., “non-dom” foreigners in London have an even sweeter deal. (“Non doms” they are called… meaning, they are resident in the United Kingdom, but not domiciliary of Great Britain.) It was probably too good to last. Recently, the Labour government buckled to pressure from the voters and introduced a new tax on the “non-doms.” Henceforth, the non-doms will have to pay an annual tax of 30,000 pounds – or about $55,000 – per year, for the privilege of living in the United Kingdom.
This amount is peanuts to the Russian billionaires, of course. But there are thousands of ‘non-doms’ to whom it is real money. The City has attracted analysts, fund managers, actuaries and mathematicians from all over the world. There are also large groups of foreigners who have made London their home because it is safer and nicer than where they came from. Whole industries have lodged themselves in London – largely because of the tax feature. A big part of the Greek shipping industry, for example, calls London home.
Now, many of these people say they are leaving. The Greeks say they are going back to Athens. The financial industry says it’s going to Geneva. And all of a sudden, there’s a gush of interest in Dubai.
We don’t know how much effect this new tax will have. But it, along with a decline in the financial industry, makes it a poor time to buy property in London.
*** Speaking of Dubai, a full-page ad in a London newspaper announces a remarkable opportunity. “Dubai Property Investment Weekend,” it proclaims.
“Learn about off-plan UAE property and return 40% to 50% of your investment per annum.”
Hmmm… a yield of 40% – 50%? How is it possible? We don’t know, but the ad tells us that we can invest 69,000 pounds and we’ll get an annual return of 33,000.
Ha… ha… ha… ha… ha…
It’s nice to see the markets functioning as they should, separating fools from their money. The actual return from an investment in Dubai property is more likely to be preceded by a minus sign. Colleague Kevin Kerr explains why:
“I haven’t been there [to Dubai] before, and know very little about the country. I saw a special on “60 Minutes” a few weeks ago while trapped on an airplane and saw how that Palm Island is completely sold out but there isn’t a soul living there, it’s almost deserted.
“I don’t think I really grasped how insane it is until I saw some of these pictures and read about plans for a spaceport, yes a spaceport and a 100,000 employee Dubailand. I know this may seem stupid… But where do they get the water (hello, it’s a desert), electricity, and everything else to support an infrastructure this big? Again, I know we are all aware of the building craze there, but I just didn’t realise the scope until now.”
Colleague Ronan MacMahan says there are ads in the Dublin airport offering a free Bentley if you buy a penthouse in Dubai.
“Apparently, they give you a Mini Cooper if you buy anything at all,” says Ronan. “But watch out. There are some 1 million apartments in the pipeline in Dubai.”
Markets and Money