As the Budget approaches, speculation is at an all-time high. In fact, this year has seen more conjecture than almost any previous Budget during my time in the industry. One of the most talked-about rumours has been the possibility of the UK introducing an exit tax.
Although the Government now appears to have ruled this out, it’s worth exploring what such a tax would entail, why it may never come to pass, and whether the mere speculation has already caused harm. Has the constant uncertainty and shifting narratives in the lead-up to the Budget left lasting damage, even without the policy being implemented?
What is an exit tax?
An exit tax would be a tax on unrealised gains which accrued when UK resident when the individual become non-resident. It is reported that this was being considered at 20% on business assets such as shares in private companies.
If an exit tax is introduced we would expect that it would take effect immediately from the day of the Budget.
The idea of an exit tax is not a new one and the majority of G7 countries already have one including France, Germany and Canada.
Sounds like a good idea then?
This policy has been supported by think tanks such as CenTax on the basis that the policy would simply align the UK with international norms. It would help re-enforce the fairness following the non-domicile changes and help prevent the “wealth flight” from the UK.
Who would be paying the exit tax?
This policy would be squarely aimed at the high-net-worth individuals who are relocating from the UK to low-tax jurisdictions – the owners of UK businesses, shares etc who are leaving the UK before a disposal and paying no tax. While the UK has previously relied on anti-avoidance rules such as the temporary non-residence rules, there is mounting evidence that these are no longer sufficient.
Are people really leaving the UK?
There have been reports that 16,500 millionaires may leave the UK this year. Herman Narula, the founder of Improbable worth £780m, is the supposedly the latest to be leaving the UK, citing a potential exit tax as the final straw for his departure. If we are to believe the rumours, the idea of the exit tax was prompted by Nik Stornosky, co-founder of Revolut leaving the UK. His departure would have cost the UK an estimated potential Capital Gains Tax liability of £3bn.
Whilst the Government appears to have back tracked on this following a political backlash, it would seem that a lot of the damage has already been done.
What is the problem?
Since Labour came to power, they have promised to make the UK a stable and predictable place to invest and do business.
But the reality seems to be the complete opposite. The constant flip flopping (raising income tax, exit taxes, etc) has frighted entrepreneurs and the financial markets. A lot of these leaks may be the Government testing reactions to potential policies but the outcome of them is giving the impression that the Government is anti-business and not a place entrepreneurs can remain due to unpredictable tax policies and increasingly burdensome tax liabilities.
The problem the Government now faces is that the damage is done. Once people have lost confidence, it is very hard to regain it.
What should people be doing now?
Whilst the introduction of an exit tax remains speculative, given ongoing fiscal pressures and policy trends it remains credible. Even if an exit tax is not introduced, it is likely there will be further tax increases that will hit business owners, which have been explored in our other Budget prediction articles.
Before the Budget on 26 November, people should be identifying their unrealised gains on UK business assets and considering the potential liabilities. If, like many, you are considering leaving the UK you should explore the timing options for breaking UK tax residence. If you like to discuss the impact of the Budget on your personal tax position please contact Stephen Kenny.
