Governments put squeeze on wealthy
Desperation is driving more and more countries to raise taxes for high earners
Two weeks ago the UK Chancellor announced he wanted to tax wealthy citizens more in his Budget. At the start of this year Germany raised its capital gains tax. Other European governments are talking tough on taxing the wealthy.
The battle to close the fiscal gaps that have opened up because of the recession and the need to bail out the banks has begun: and the wealthy are on the front line. Governments are desperate to plug huge deficits and are targeting the wealthy, who have fallen out of fashion with electorates, to raise money.
The UK was among the first to start raising taxes. From next April those earning £150,000 (€168,000) a year and above face having just over half their income above this threshold taken by the taxman. Ronnie Ludwig, a partner at private client accountancy firm Saffery Champness, said: “It is likely that with dramatic tax hikes announced in the UK Budget, high earners will be considering moving to jurisdictions with a less punitive tax regime.”
But the options for the rich to participate in tax arbitrage abroad are dwindling, especially as the attack on the wealthy is also being directed at tax havens – traditional refuges for serious private money – which are being forced to sign tax accords and prise open secret bank accounts.
Even Switzerland, one of the most recalcitrant of all offshore centres, largely because it is the biggest and has used its size to resist calls for more transparency, is falling into line.
Financial News looks at what the wealthy can expect to pay in Europe’s big economies – and where they can hide when the heat is turned up by tax-starved governments.
High tax regimes
• UK The Labour Government suggested when it came to power more than 10 years ago that it would not extract more tax from the wealthy. But last year it started to renege on the promise by clamping down on tax perks for resident non-domicile individuals with the introduction of a £30,000 levy on overseas income. The promise was broken explicitly two weeks ago, when Alistair Darling, the Chancellor of the Exchequer, introduced an additional 5% to the 45% maximum rate of tax that had itself been proposed just a few months earlier for those earning more than £150,000.
Ludwig said: “Even before the last Budget, the total tax burden in the UK had increased by 76% since Labour came to power.” On top of the bigger tax burden, the UK taxman levies a steep rate on inheritance, taking 40% of estates worth more than £320,000.
• Germany
Germany has the second-biggest wealthy population in Europe after the UK, with about 400,000 individuals with assets of $1m (€756,000) or more – and they are subject to high rates of taxes. Income tax is levied at 45% for those earning above €250,000.
At the beginning of the year, Germany introduced a capital gains tax, which can be as high as 25%. The tax has enraged many of the country’s small and medium-sized business owners – the Mittelstand. Accountants and private client lawyers say a growing number of the country’s wealthy are moving to Switzerland and Luxembourg to avoid the high tax regime at home.
Like the UK and Spain, Germany is not a good place to pass on wealth. Inheritance tax is as high as 50% on the biggest estates.
• France
President Nicolas Sarkozy secured the vote of the wealthy by promising to abolish the country’s controversial wealth tax and go easy on the wealthy, but he has so far failed to show much commitment on these promises. The wealth tax remains in place and hasn’t been lowered – and with the mood in the country increasingly hostile to the high net worth community, Sarkozy is unlikely to remember his election promises to them.
Income tax for the country’s highest earners is at the lower end of the higher tax rate countries in Europe – at 40% on income above €67,000 ($88,000).
Nevertheless, expect to pay a lot for inheritance tax, with the tax authorities taking 60% on the biggest estates.
• Spain
The wealthy flourished in Spain during the credit boom years and the Government backed them by doing away with the country’s wealth tax last year. High income earners pay 43% of their income in tax, but Spain’s growing budget deficit to pay for a steep decline in economic activity has prompted some in the Government to push for this rate to be increased.
Death in Spain is also an expensive business: Spanish citizens with big estates are liable to death duties of 80% on their entire wealth.
Nevertheless, those resident non-domicile individuals annoyed with the UK tax crackdown might want to consider moving to one of the Costas. Under the so-called “Beckham Law” introduced in 2005 to attract wealthy foreigners such as footballer David Beckham, non-citizens can opt for non-Spanish residency and pay no tax on their overseas earnings – although only up to a period of six years.
• Sweden
Sweden has never been particularly tax-friendly to its wealthy citizens, leading to some prominent Swedish business tycoons, such as Ingvar Kamprad and Hans Rausing, of Ikea and Tetra Pak fame respectively, to become tax exiles. The top income tax rate is a hefty 56% – the highest in Europe. Capital gains tax is also high in Sweden – at 30%. But the land of Abba has no wealth tax and lets its citizens pass on wealth to the next generation without any inheritance tax.
• Belgium
Belgium apparently does not like its higher-paid citizens getting too much of their gross incomes and has a top rate tax of 50% – and residents only need to be earning €32,000 before they move into this bracket. Passing on wealth in Belgium also looks unattractive: biggest estates pay up to 80% on wealth transfer.
Nevertheless, Belgium does not tax resident foreigners on their worldwide income outside of the country – the reason why so many retired French dentists go and live there.
Safe havens
• Monaco
The Principality continues to be the place to go in Europe if you want to pay no tax on your income, with the tax rate at zero. This attracts some of the world’s wealthiest individuals, including the UK retail tycoon Sir Philip Green, to set up residency, although finding a place to live can be hard. Christian Kälin, a partner at Henley & Partners, an international residence and citizenship planning consultancy, said: “If you have a high salary that could be paid anywhere, I’d recommend moving to Monaco where there is no income tax at all. Also, if you have high interest or dividend income, Monaco is very attractive.”
Monaco’s residents are hardly taxed on anything – there is no capital gains tax, no wealth tax, and only a 16% tax inheritance tax on assets held in the tax haven.
Residents from other countries can also rest assured that the taxman from the country of which they claim citizenship won’t be running after them to come clean on tax matters; Monaco only has one bilateral tax agreement in place – with France.
• Switzerland
Switzerland believes income tax rates should be competitive – internationally and domestically. It does this domestically by allowing an extraordinary amount of independence to its citizens to tax themselves. Although the Federal Government in Berne takes 11.5% of taxes on top income levels, the cantons, or states, and even the municipalities within cantons, have the freedom to set their own income tax on top of the federal rate.
This gives rise to several different income tax rates throughout the Alpine nation – for example, the canton of Obwalden imposes a flat rate of 12% across all income levels, whereas cantons such as Geneva and Zurich take considerably more and tax progressively.
In addition, Switzerland has no capital gains tax, but there is a small wealth tax. Those wealthy Europeans thinking about relocating to Switzerland can also opt to pay a lump-sum income tax across federal, cantonal and municipal levels instead of paying the ordinary Swiss income tax and net wealth tax.
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