London's learning

'London levy' targets distortive foreign inflows

Say hello to the UK's latest fiscal innovation: the "London levy". That's probably not the way that Chancellor George Osborne would portray reforms to the taxation of property and non-domicile status, outlined in his December 3 autumn statement. But making the UK capital slightly less attractive for the global super rich is a logical move.

Osborne's first step is an overhaul of stamp duty, which taxes property transactions. The existing system required home buyers to pay a "slab" rate on the entire purchase price, starting at zero and rising to seven per cent for deals above £ 2 million ($3.1 million). The rates have now been hiked, hitting 12 per cent for transactions above £1.5 million. But crucially, the purchase price is now broken into constituent bands, each taxed accordingly, instead of the highest qualifying rate being charged on the headline value.

The reform makes sense on basic efficiency grounds. It entails an effective tax cut for the 98 per cent who don't own properties worth over £938,000, and so makes the system more progressive. And because the average London house price is £508,000, against a UK average of £273,000, it means a tax cut for everyone moving outside the capital.

This is a sensible use of taxation incentives. House prices in London are 38 percent above their peak in 2007. Those elsewhere have only just recovered their losses. An alternative way of reining in soaring London property prices would be to hike UK interest rates. But doing so would mess up the rest of the country.

Reforming the other component of the London levy, non-domicile status, will also have the effect of taking money out of the capital. Currently, foreigners can live in the UK without paying UK tax on a portion of their income so long as they pay a £30,000-annual charge. This will be upped to £90,000 for those living in the UK for 17 of the last 20 years. It seems drastic, but the Treasury is unlikely to have sanctioned the move if it destroyed the economic justification for high-value workers staying in Britain.

Foreign inflows have proved distortive to the UK economy, all the more so since the crisis. Osborne is right to start redressing the balance.