British HNWs leaving the UK for low-tax destinations could be required to pay a 20 per cent levy on their business assets under plans reportedly being developed by Rachel Reeves ahead of the Budget.
The proposed ‘settling-up charge’ could raise about £2 billion by applying a 20 per cent tax on certain assets when individuals move abroad, according to The Times. Unlike the current system, which exempts many company shares from capital gains tax, the new rule would tax their value upon departure.
The proposal would align the UK with other G7 countries, as it currently stands out (along with Italy) as one of the few without an existing exit tax.
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How likely is an exit tax?
‘I’ve studied five countries with exit taxes – Germany, Spain, France, Canada and the USA – and I have concluded that it would not be of much use to the UK,’ wrote Stephenson Harwood partner James Quarmby on LinkedIn after the first reports emerged.
The tax expert said an exit tax would be too complex to enforce, hard to value fairly, and could breach international agreements – namely Article 1, Protocol 1 of the ECHR on the protection of property. He also believes it would raise little immediate revenue, deter investment and prompt wealthy individuals to leave before it takes effect.
One of the main concerns raised by tax experts who spoke to Spear’s is that the proposed exit tax could accelerate the existing trend of wealthy individuals leaving – or deter new ones from coming to – the UK.
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Nonetheless, Spear’s asked experts Charlie Tee and Christopher Groves, tax partners at Withers LLP, along with Julia Rosenbloom, tax partner at Shakespeare Martineau, about the likelihood of an exit tax being introduced by Reeves. Tee and Groves gave it a six-out-of-ten likelihood, while Rosenbloom marked its probability a seven.
[See also: Where are the new non-dom hubs? Advisers reveal leading destinations after Labour win]
HNW concerns
For tax lawyer Robert Macro of Druces, an exit tax would ‘ultimately be self-defeating,’ he told Spear’s. ‘The UK needs to find a way to attract investment, not prevent capital leaving.’
‘Exit taxes are a deterrent to those thinking of coming to the UK under the new and limited FIG regime. If you want to see how a targeted regime can work in favour of a nation’s coffers, look at the Italian regime and try to rent a significant property around Milan,’ he said, alluding to Italy’s tax incentives that have attracted wealthy foreigners and driven up demand for luxury housing.
Macro added: ‘We need to look at the way other countries view international capital and realise we are in a competitive market and have effectively ceded any advantages of having had one of the oldest regimes to attract internationally mobile high-net-worth individuals.’
[See also: “Buy-to-leave”: The new property trend among London’s departing non-doms]
When would an exit tax take effect?
Another key concern highlighted by experts is the uncertainty around when an exit tax might take effect. David Lesperance of tax law firm Lesperance & Associates told Spear’s he has been ‘inundated’ with inquiries since the rumour of a possible exit tax hit the media – from ‘desperate’ clients looking to put a strategy in place to become non-resident in the UK before the Budget next month.
‘Their fear is that the Chancellor will make the effective date November 26. If there is an exit tax and the implementation date is for the new tax year, I expect to have as busy a season as last year’s departing non-doms,’ he added.
Still, Lesperance believes that ‘either way, the costs of departing are a rounding error compared to a 20 per cent tax on unrealised gains.’
[See also: Budget 2025: Rachel Reeves could target LLPs – here’s what it means for UHNWs]
Would an exit tax apply solely to UK assets?
An additional issue experts highlight is whether an exit tax would apply solely to UK assets or extend to worldwide capital gains. According to Lesperance, ‘if we take into account other G20 countries which already have exit taxes, it’s easy to see that the Chancellor would follow their example and apply the deemed disposition on worldwide assets.’
Is leaving ahead of the Budget a good idea?
Despite talk of an exit tax, experts warn against leaving the UK ahead of Reeves’s Budget on November 26. Rosenbloom says: ‘Individuals who are considering exiting in anticipation of this shouldn’t make that decision hastily.’
As unnerving as the uncertainty is, Rosenbloom says there are ‘so many factors and variables that rushing to exit prior to the Budget in three weeks is unlikely to be a good idea.’
The UK’s strict statutory residence test could mean that those who do decide to leave ‘find they do not lose UK tax status until next year anyway, which means they might not get the result they expect.’
Tee and Groves acknowledge that some people could look to leave the UK and benefit from split-year treatment – so as to have a non-resident part of the year (in which the Budget falls) – but warn they will ‘have to move quickly.’
Speculation is rife ahead of the upcoming Budget, when the Chancellor is widely expected to introduce tax changes to address the £30 billion shortfall in public finances, according to an October 13 report by the Institute for Fiscal Studies (IFS).
The November 26 statement is anticipated to include significant adjustments to inheritance tax, income tax, capital gains tax, and rules affecting LLPs, with experts cautioning that these measures could have substantial financial and personal implications for HNW and UHNW individuals.
