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Analysis-Super-rich may quit UK over Labour plans for inheritance taxes on trusts

Published 06/14/2024, 02:06 AM
Updated 06/14/2024, 02:36 AM
© Reuters. Shadow Secretary of State for Justice Shabana Mahmood poses for a photograph with Britain's Labour Party election manifesto ahead of its launch in Manchester, Britain, June 13, 2024. REUTERS/Phil Noble

By Sinead Cruise

LONDON (Reuters) - Private banks and advisers to Britain's super-rich say some clients may quit the country if Labour wins next month's general election and pushes ahead with plans to abolish tax protections on offshore wealth they wanted to pass to future generations.

Keir Starmer's Labour Party, which leads in the opinion polls and which published its manifesto on Thursday, is targeting Britain's wealthiest people to support a public spending programme focused on schools, welfare, energy reform and the National Health Service.

Around 70,000 people who live in Britain but pay little or no UK tax on the money they earn overseas were already facing higher bills after the incumbent Conservative government said in March it would phase out this "non-dom" status over time.

But in proposals published in April, Labour said it would move faster to scrap relief on foreign-earned income and expand Britain's inheritance tax regime to include foreign assets held in trusts designed to mitigate such levies.

Critics say the proposed changes could do Britain's lukewarm economy more harm than good, making the country a less attractive place for the world's wealthy to live and invest in, reducing overall tax revenues rather than growing them.

The Labour Party did not immediately respond to a request for comment.

Economists say overall tax levels are likely to approach an all-time high whoever wins the election, despite promises by both main parties not to increase major tax rates.

Labour has said it will not raise income tax or National Insurance social security contributions on working people. But it has pledged to narrow the gap between UK tax owed and tax collected, which widened by 5 billion pounds to 36 billion pounds ($46 billion) in the 2021/22 tax year.

Catherine de Maid, partner at law firm Burges Salmon, said her largest clients were prepared to pay higher tax on earnings and capital gains, but the inheritance duty proposal was a "deal breaker" for at least three of them.

"Inheritance tax in the UK is high at 40%, and (clients) are not willing to pay this rate of tax on assets which were often acquired or earned many years before they had any connection with the UK. They would prefer to leave altogether," she said.

Spain, Italy, Switzerland, Dubai and Singapore are proving popular among wealthy UK families seeking a lower-tax place to live, said Nigel Green, CEO of wealth adviser DeVere Group.

There is no comparable inheritance tax in the United Arab Emirates, Singapore or most Swiss cantons, while Spain and Italy impose rates of 34% and 8% respectively, data from PWC shows.

Traditionally, governments who change inheritance tax treatment of trusts have not applied changes retroactively to existing structures.

But law firms and advisers say Labour is unlikely to permit "grandfathering" of such schemes, citing comments attributed to shadow finance minister Rachel Reeves in some media reports.

STAY OR GO

Income tax changes under a Labour government might also prompt thousands of roving international entrepreneurs and financiers who have set up home in Britain to spend less time in the country.

Labour has pledged to reform how performance-related pay earned by private equity investors is taxed as capital gains.

Most wealthy individuals were "internationally mobile" and devising ways to drop UK tax residency was high on their list of plans, according to Mark Routen, Head of Tax at UK and Dubai-based wealth manager Hoxton Capital Management.

"This is not a drastic as it sounds, as under the statutory residence test in the UK, it could just mean a modest reduction in the number of days they can stay here depending on what basis they are considered resident," Routen said, adding that "several" clients had or were considering making this move.

Alexandra Hewazy, Head of Key Clients and Resident Non Dom Wealth Advisory at Barclays Private Bank said uncertainty was encouraging some to reduce exposure to the UK. 

"This isn't just their asset base but can also be their physical presence and the intellectual capital which comes with this," she said.

Charging capital gains tax at the same rate as income tax would raise 12 billion pounds a year, while value-added tax (VAT) on financial services - largely consumed by the well-off - could also raise around 9 billion pounds, analysis by Richard Murphy, political economist and professor of accounting at Sheffield University, shows.

"Can this sector and those who earn most in it afford to pay more tax? Yes, more so than absolutely anybody else in society," said Murphy, a former adviser to ex-Labour leader Jeremy Corbyn.

James Whittaker, head of UK wealth management and CEO of DB UK Bank, said most ultra high net worth individuals were holding their nerve before making big decisions.

"There's an enormous amount to weigh up when switching from one jurisdiction to another. We continue to talk to people who want to move wealth here, particularly from the United States, but they want to see detailed legislation first," he added.

And some wealthy Britons welcome Labour's proposed reforms.

Rebecca Gowland, executive director at Patriotic Millionaires UK, a non-partisan network of wealthy individuals who believe the super-rich should pay more tax, told Reuters some members have had, or still have, non-dom status but are "categorical" in their support of plans to close the loopholes.

© Reuters. FILE PHOTO: Shadow Secretary of State for Justice Shabana Mahmood poses for a photograph with Britain's Labour Party election manifesto ahead of its launch in Manchester, Britain, June 13, 2024. REUTERS/Phil Noble

"While this might lead to a small number of people considering whether or not they want to leave, the vast majority of millionaires will not be going anywhere," Gowland said.

($1 = 0.7827 pounds)

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