Analysis: Super-rich could leave UK due to Labour plans on inheritance tax

LONDON, UK (Reuters) – Private banks and advisers of Britain’s super-rich have warned that some clients could leave the country if Labour wins the general election next month and implements plans to eliminate tax protections for offshore wealth.

Keir’s Labour Party is the leader in opinion polls, and it published its manifesto Thursday. It targets Britain’s richest people for a public expenditure programme that focuses on schools, welfare reform, energy and the National Health Service.

The Conservative government announced in March that it would gradually phase out the “nondom” status of around 70,000 British citizens who earn money overseas but do not pay UK taxes.

In proposals published in April, Labour announced that it would scrap the relief on foreign-earned earnings and expand Britain’s estate tax regime to include assets held abroad in trusts intended to reduce such levies.

The proposed changes, say critics, could be detrimental to Britain’s economy, as they would make it less attractive for wealthy investors and residents, thus reducing tax revenues.

The Labour Party didn’t immediately respond to an inquiry for comment.

Economists predict that overall tax levels will likely reach a record high, regardless of who wins the election. This is despite both major parties’ promises not to raise major tax rates.

Labour has stated that it will not increase income tax or National Insurance Social Security contributions for working people. It has promised to reduce the gap between UK taxes owed and collected. This gap widened from 36 billion pounds to 46 billion pounds in the tax year 2021/22.

Catherine de Maid is a partner in the law firm Burges Salmon. She said that her biggest clients were willing to pay a higher tax rate on capital gains and earnings, but inheritance duty was deemed ‘deal-breaker’ for at least three.

“Inheritance Tax in the UK is very high at 40% and (clients are) not willing to pay such a rate of tax for assets that they often earned or acquired many years before having any connection with the UK. She said that they would rather leave the UK altogether.

Nigel Green of DeVere Group, a wealth advisor, says that wealthy UK families are looking for a place to live with lower taxes.

PWC data shows that the United Arab Emirates and Singapore, as well as most Swiss cantons do not impose an inheritance tax comparable to other countries. Spain and Italy, however, impose rates between 34% and 8 %.

In the past, governments that changed the inheritance tax treatment for trusts did not retroactively apply changes to existing structures.

Law firms and advisors claim that Labour will not allow “grandfathering” in such schemes. They cite comments made by Rachel Reeves, shadow finance minister.

STAY OR GO

The Labour government’s changes to income tax could also cause thousands of international financiers and entrepreneurs who have settled in Britain to spend less money in the country.

Labour has promised to reform the way performance-related compensation earned by private equity shareholders is taxed under capital gains.

Mark Routen is the Head of Tax for Hoxton Capital Management, a UK-based wealth management firm based in Dubai. He says that many wealthy individuals are “internationally mobilized” and have plans to abandon their UK tax residency.

Routen explained that this was not as drastic as it may sound, because under the UK’s statutory residency test, it might just mean a modest decrease in the number days they can spend here, depending on how they are considered residents,” he said. He added that “several clients” had made or were planning to make the move.

Alexandra Hewazy is the Head of Key Clients & Resident Non Doms Wealth Advisory for Barclays Private Bank. She said that uncertainty encouraged some people to reduce their exposure to UK.

She said that it is not just about their assets, but also their physical presence as well as the intellectual capital that comes with it.

Richard Murphy, professor of accounting and political economist at Sheffield University, has calculated that charging capital gains tax the same as income tax could raise around 12 billion pounds per year. Value-added taxes (VAT) for financial services, which are largely consumed by wealthy people, would also be able to raise 9 billion pounds.

Can this sector, and those that earn the most from it, afford to pay higher taxes? Murphy, a former advisor to ex-Labour Leader Jeremy Corbyn, said: “Yes, more than anyone else in the society.”

James Whittaker said that most ultra-high net worth individuals are able to hold their nerves before making major decisions.

There are many factors to consider when moving from one jurisdiction into another. “We continue to speak to people from the United States who are interested in moving wealth to Canada, but first they want to review detailed legislation,” he said.

Some wealthy Britons have welcomed Labour’s reform proposals.

Rebecca Gowland is the executive director of Patriotic Millionaires UK. This non-partisan group of wealthy individuals believes that the super-rich need to pay more taxes. She told Reuters that some of its members had or have non-dom status, but they are “categorical in their support” of plans to close loopholes.

Gowland stated that “while this may lead a few people to consider whether they want to move, the vast majority will not.”

Related Articles