The ultra rich exodus has made an exit tax tempting. Would it work?
Millionaires are leaving the UK in record numbers, prompting the Resolution Foundation, an influential left-wing think tank, to propose an exit tax. Ali Lyon explores whether one would work.
Charlie Mullins has always liked to stand out from the crowd.
With his striking resemblance to Rod Stewart -sporting spiky bright blonde hair, a suspicious tan, luminescent teeth, and trousers a size tighter than the convention – the outspoken founder of Pimlico Plumbers is among the more vibrant of the UK’s top entrepreneurs.
In actual fact, the move from the tycoon, which will involve him selling his £10m London penthouse, is uncharacteristically conventional.
According to Henley & Partners’ 2024 Private Wealth Migration Report, Mullins will be one of 9,500 millionaires to leave the UK this year, making the country second only to China when it comes to high net worth emigration. And City PM has reported on several high-profile tax lawyers and wealth advisors warning they are already receiving record inbound enquiries about the idea of moving abroad.
With fears of a “wealth exodus” gathering steam in the weeks leading up to the Chancellor’s first budget in October, one of the proposals made by the Resolution Foundation – an influential left-of-centre think tank – on ways that Rachel Reeves could look to fill her £22bn “fiscal black hole” is likely to attract a disproportionate amount of attention.
“What we’re proposing,” Adam Corlett, the think tank’s principal economist, tells City PM, “is that – alongside proposals like increasing to the marginal rate of CGT [capital gains tax] – CGT should be applied on any gains people make as and when they look to move country.”
Currently, if a wealthy individual were to relocate to somewhere like Monaco having amassed profits from shares, corporate bonds or other investments during their time in the UK, they would not pay CGT on any gains made while in the UK.
Closing that perceived loophole is – Corlett argues – a logical step, given the fiscal bind in which the UK finds itself. “We wanted to call to highlight that leaving the country and left people with the option to basically pay no capital gains tax,” he says. “We just think that if a loophole is available, then the capacity to raise money from CGT is fairly limited.”
A left-leaning think tank proposing a new tax that disproportionately targets the wealthy, and which is ostensibly just a small part of a wider raft of tax and spending proposals would not, in ordinary circumstances, be especially noteworthy. Especially when it already has an established track record in similar economies to the UK, like Australia and Canada.
But amid the wealth exodus warnings, and the need to raise revenue, some believe the proposal could be an alluring one for Reeves to stem the tide. “I can see them bringing in an exit tax,” David Lesperance, a founding partner at the wealth advisory Lesperance and Associates tells City PM “Because Reeves can point to it and say, ‘hey, they made this money – this increase in value – when while they were resident here, and they should pay their tax on it here.’
“They can also say that the US, Canada, Australia and most developed western economies have some form of one in place already, so it’s not like it would be wildly outrageous here.”
And relative to other taxes on society’s most moneyed, there is more precedent for it generating tax receipts, than other fashionable but impractical suggestions. “[Labour] can easily argue that an exit tax has worked for all these other countries for decades. It’s not like a wealth tax, which a lot of countries have tried and dropped because it was ineffective,” Lesperance says. “I can see the allure.”
An exit tax will result in a ‘mad scramble’ of departures
But just because an idea is tempting doesn’t necessarily make it wise.
Victoria Price, who leads the private capital practice at financial services firm Alvarez and Marsal, has been “busier than ever” with enquiries from clients about a potential move aboard but sees several pitfalls in any move to saddle her clients with a tax bill at the departure lounge.
“The first thing to say is that CGT doesn’t actually raise much for the Treasury in the scheme of things,” she says. “Last year it was £14bn, which is a very, very small amount.”
“I also don’t think it would be an exaggeration to say that introducing it in the Autumn would result in a six-month scramble of people fleeing for the door [because it would likely come into force at the start of the tax year in April, giving people six months to plan].
“So if, in October, people wake up to find CGT is going up to 35 per cent, and are told, ‘there will also be an exit from 5 April,’ anybody who was being indecisive will, without a shadow of a doubt, take action at that point.”
But applying an exit tax wouldn’t just send people rushing for the exit door before it came in, says Price. The number of inbound wealth creators would dry up, too. “It would make the UK a less attractive proposition. It would essentially say to people: come over, be successful, build up some wealth, and we’re going to tax you on the way out.”
To sacrifice all that for the comparatively trifling amount of money applying it would raise would, Price argues, be an act of economic self-harm.
A complicated tax is a bad tax
In addition to all the real-world consequences, the tax’s practical application would present a further challenge.
Traditional CGT is applied to profits made on an investment when it is sold, making it easy for the exchequer to calculate how much money it is owed. But an exit tax on capital gains in the mould of that proposed by the Resolution Foundation would apply without a transaction, meaning the exchequer would be forced to value each emigre’s assets – and what proportion of them is owed – when they depart.
This would not be a problem in highly liquid asset classes such as shares and bonds, which have a constant market price. But in areas like commercial property, private equity, and second homes—where transactions are fewer and further between—officials at HMRC would become mired in establishing how much their assets could be sold for in the absence of a buyer or to do it for them.
Liquidity issues could give rise to other suboptimal scenarios. “What kind of provisions,” says Alvarez and Marsal’s Price, “would there be in place for people that are leaving the UK, who own an asset that they either can’t or don’t want to sell… and don’t have the liquidity to be able to pay what they owe?”
To get around this, the Norwegian government has allowed emigres to indemnify their former country of residence in interest-free instalments for up to 12 years, and Canada allows people to defer paying the tax until they have disposed of the sticky asset in question.
Had Mullins not sold Pimlico Plumbers to Neighbourly, a US domestic services platform owned by private equity behemoth KKR, three years ago, he would be exactly the type of person to be caught up in such an imbroglio.
Instead, by moving before a potentially punitive budget and also selling his plumbing business before leaving the country, he has avoided the possibility of incurring much damage from either, potentially saving himself millions.
And given Dubai and Spain’s more clement climate, he might find he makes further savings when topping up his distinctive tan and bleached hair.