City of London fears that 'non-dom' axe would hit competitiveness

David Cameron once promised to "lay out the red carpet" for French businesses wishing to escape high taxes imposed by Francois Hollande's Socialist government.

That red carpet may now be moved to mainland Europe, Asia and the US for the 116,000 people in London who claim the "non-domicile" tax status the Labour party has promised to abolish if it wins power.

The proposal is seen by some as the final straw in a series of policies that appear hostile to finance, big business and the rich. Viewed together with announcements that the party would create a "mansion tax" that would apply to homes worth £2m or more and would increase income tax, the City fears that London's commercial attractiveness would be eroded.

Some even claim that all 116,000 could leave, but few analysts take the idea of such a wholesale flight seriously.

"I wouldn't move for the increase in income tax," said one French hedge fund manager. "But if Labour goes through with this plan, I will move to Geneva. I'll be in Megeve [ski resort] every weekend and a three-hour drive from my house in the south of France. The problem will be to sell my house in London. The property market is going to crash."

Another French hedge fund manager said: "They'll be opening up bottles of Champagne in Hong Kong and Singapore [if Labour wins]."

Proponents of the 200-year-old "non-dom" system, which allows holders to live in Britain - often for many years - while claiming another country as their permanent home, say it has been a huge source of competitive advantage for London, helping attract foreigners who are high spenders and pay tax on their UK earnings.

The £8.2bn contribution in 2012-13 from just under 115,000 non-doms is equivalent to the contributions of about 10m lower-rate income taxpayers, according to figures from HM Revenue & Customs.

For London's large French finance community - Boris Johnson, once claimed he was mayor of the sixth-largest French city in the world - the Labour proposal stirs up painful recollections of Mr Hollande's 75 per cent tax rate on high earners, which he unveiled during his election campaign in 2012 and dropped last year.

The second hedge fund manager added: "You're going to have an absolute repeat of France if Ed Miliband wins. For everyone who has moved here for tax reasons or because they hated France, what are they going to do?"

A French private equity manager said: "I'm certainly going to reassess being based in London. These are exactly the type of policies that put my country into the trouble it's in now."

Despite talk of an exodus, there are few cities that can claim to be as cosmopolitan and diverse as London, with the advantages of its language and legal system.

Philippe Jabre, founder of Jabre Capital, who swapped London for Geneva in 2006, agrees that the threat of exodus is overblown, because while there are "a few pricey alternatives" such as Switzerland, Belgium and Portugal, they cannot accommodate everyone.

He said: "Based on what happened in Zurich when it removed the forfait status [a favourable tax status for foreigners], it is likely that at least a third will stay and pay full tax, a third will stop claiming and a third will leave."

One Frenchman, Frederic Desage-Bonnet, is moving from London to Lisbon this summer, after a two-decade career in hedge funds, to set up a venture buying 19th-century buildings in Lisbon and redeveloping them as luxury flats. "We are targeting foreigners who are moving to Portugal because of its favourable tax environment," he said.

Most of all, London's financiers worry about the direction of travel. One UK hedge fund manager said: "Removing non-dom status feels like the beginning, rather than the end. I think that's what is making people nervous."

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