So, the election is over and as expected Labour has a super majority. What does this mean for both domiciled and non-domiciled UK resident high net worth investors, if Labour fulfils its election manifesto promises?
By David Lesperance, Managing Director at Lesperance & Associates
The most obvious change will be that the carried interest regime will be changed so that carried interest is treated as income, which for many would be taxed at 45%. In addition, excluded property, trusts will no longer protect against non-UK assets being included in the 40% IHT hit. Finally, the current Remittance Tax system is going to end. All big changes!
How many UK taxpayers will leave Britain?
The big question for Labour now is “Which and how many UK taxpayers will leave?” as a result of these changes.
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To answer this question, it is worth understanding that all UK taxpayers have a certain amount of “life inertia” in the UK. According to Newtonian principles, they will only depart if the force of additional taxation is greater than their current inertia AND that there is a new, lower tax burden country that will meet the personal and business needs of all family members who will gladly move to this new home country.
While all investors will calculate their tax hit from the loss of carried interest and IHT, only those “Non Doms” electing Remittance Tax status will be impacted by its demise. In looking at this subset, it is essential to recognise that there are really two different types of Non-Dom investors.
The first includes those foreigners who need to continue to work in the UK to make and maintain their wealth. Often their income is mostly / all UK source, and they use the Remittance Basis to protect the income and capital gain earned by their pre-UK assets. They may also be affluent “millionaires” who can easily deal with IHT through insurance and other means. As a result, members of this group might be less likely to consider leaving the UK.
The second group of wealthy investors are location independent when it comes to making and maintaining their wealth. They may also be UHNW (centi-millionaire and billionaire) foreigners who are able to arrange their affairs so that they have minimal income.
Furthermore, rather than trigger capital gains by selling investments, they can borrow against them to cover their living expenses. However, even for this group, Labour’s announcement regarding excluded property trusts means exposure of their worldwide assets to 40% IHT. This is a major shove out the door, and as a result they are highly likely to consider leaving the UK.
What are the alternatives to living in the UK?
A recent LSE study asserted that “millionaires” will not leave because of the wonderful lifestyle in the UK and because they think small island tax havens are “boring”. Unfortunately this study failed to note that there are a great many excellent alternative tax residences for departing fund managers.
Recently I gave a presentation where I discussed which types of Non Doms would leave and examined 17 different…and attractive…jurisdictions they could consider.
These potential destinations include EU and European options like Ireland, Portugal, Spain, Italy, Greece, Switzerland, Malta, Cyprus and Israel. Other options such as Canada, US, Singapore, UAE and even New Zealand can also match a UK lifestyle at a significantly lower tax burden through specific regimes or proper tax planning.
I also recently participated in a webinar which was a deep dive on the US as a destination for both UK domiciled and Non-Dom investors. In both events, the attendees were very attentive and had a lot of questions…they were taking this topic very seriously!
Will this be an issue for UK tax revenues?
So, what will be the impact of HNW investors departing the UK? The simplest way to guess is by looking at the impact of departing Non Doms. First, one can start with the fact that there were 37,000 Non Doms in 2020-2021 who contributed an average of £170,000 each. In contrast, the richest fifth (i.e. top 20%) of UK taxpayers paid on average £44,300 in direct taxes in 2021/22. Therefore the “average” Non-Dom is actually a “super contributor” to the UK treasury and key to a new Labour government being able to fund its spending priorities. One does not need to think too hard before realising the significant impact of the loss to annual revenues should even a small number leave the UK tax system behind.
It is also worth pointing out that the high Non-Dom average tax contribution is a result of a much larger contribution by UHNW Non Doms. For example, Akshata Murty paid £4.4m in UK tax the year before she voluntarily agreed to stop electing to pay UK tax on a Remittance basis. If one looks at the 2024 The Times Rich List it is clear that it is dominated by UHNW Non Doms. The most interesting revelation in this year’s Times Rich List was that the number of billionaires actually dropped. These would have been the first movers.
The second movers are investors who have weighed their life inertia against their larger future tax burden. Not surprisingly, they are now sitting down with their families to develop their plans to escape Labour’s “Tax the Rich” wildfire. Before actually triggering their departure plan they are undoubtedly waiting to get a better sense of Rachel Reeves’ final proposals and the timing. If their worst (realistic) fears are met, they are prepared and will depart.
The third movers will be those who wait until Labour’s proposals kick in and they realise how ugly things are.
The fourth movers are those UK domiciles who understand that when the Non-Dom tax receipts disappoint, they will be the next target for new capital gains (including a deemed disposition Exit tax) and IHT tax hits…. along with new gift and wealth taxes….to make up the shortfall.
So, whether one is an UHNW Non-Dom investor in the UK or an investor who is currently tied to a UK office and life, it is time to start planning for the worst (both promised and predictable), while hoping for the best.
Given the amount of time that is normally required to make a decision to leave; secure the desired immigration status and organise the necessities of a new tax home (e.g. residence, schools, etc.) and to cleanly extricate one’s family from the UK, there is no time to waste.
