UK's ultra-rich feel the pinch from Labour's tax-raising budget

LONDON — Britain's wealthy are feeling the pinch following a slew of targeted tax hikes in the Labour government's budget, which they say failed to heed warnings of a wealth and investment exodus.

U.K. Finance Minister Rachel Reeves confirmed last week that Britain's controversial non-dom regime for wealthy foreigners will be abolished from April 2025, and that all long-term residents will be subject to inheritance tax (IHT) on their worldwide assets, including those held in trust.

The clampdown formed part of wider measures aimed at the upper echelons, with private equity bosses, private schools, second homes and private jets all faced with new levies.

Reeves said her £40 billion tax-hiking budget was necessary to plug a black hole in the country's finances, boost growth and alleviate pressure on "working people." But many wealthy individuals say they have now become targets and are making good on their pre-budget pledges to leave the U.K. — taking their investments with them.

"You're going to see a big movement of people from the City [of London] and from the Times Rich List group," David Lesperance, founder and principal at international tax and immigration advisory firm Lesperance and Associates, told CNBC on Thursday via video call. "I think they could leave en masse."

Within the first two days of Reeves' announcement, Lesperance said he received requests from seven clients to trigger their U.K. exit strategy and a further three new inquiries from wealthy U.K. taxpayers looking to leave before April. That adds to pre-emptive moves taken by clients ahead of and in the wake of Labour's July 4 election win, he said.

The U.K.'s non-dom regime is a 200-year-old tax rule, which permits people living in the U.K., but who are domiciled elsewhere, to avoid paying tax on income and capital gains earned overseas for up to 15 years. As of 2023, an estimated 74,000 people enjoyed the status, up from 68,900 the previous year.

Positioning her plans in the interests of "fairness," Reeves said Wednesday that she was removing the "outdated concept of domicile" and replacing it with a new "internationally competitive" residence-based scheme.

Under the new rules, effective April 2025, anyone who has been a tax resident in the U.K. for more than four years will be subject to U.K. tax on their foreign income and gains. New arrivals to the U.K. will receive 100% U.K. tax relief for their first four years, so long as they have been non-resident for the last 10 years.

Residents will also be subject to inheritance tax (IHT) on their worldwide assets, but existing non-doms will receive temporary repatriation relief on money they bring into the U.K. for up to three years.

The government said the non-dom measures alone will raise £12.7 billion over the course of the parliament. That's in addition to the £21.1 billion the independent Office for Budget Responsibility (OBR) forecast to be raised by earlier changes to the non-dom regime announced by the Conservatives in March.

"Having a proper system in place, we will remain extremely internationally competitive," a Treasury spokesperson told CNBC during a post-budget press briefing on Wednesday.

However, Steven Porter, partner and head of tax disputes and investigations at law firm Pinsent Masons, said "the jury is still out" on whether the measures would raise or lower tax take over the long-term, and that the government should be careful not to push people out.

"Although the draft legislation has now been released, the Government still has time to create a new non-dom system that works for internationally-mobile individuals," Porter said in a statement.

Lobby groups have for weeks been warning of an imminent wealth exodus under a hard-line approach from the chancellor, arguing that jurisdictions such as Italy, Switzerland and Dubai are "smelling the fear" and luring away Britain's super-rich.

Foreign Investors for Britain (FIFB), a group set up in the wake of Labour's election, issued a proposal to the government for an Italian-style tiered tax regime (TTR), which would see wealthy non-doms charged a flat annual fee in exchange for tax exemptions on non-U.K. assets.

Leslie Macleod Miller, chief executive of FIFB, on Thursday slammed the government's plans as sparking "economic mire" and urged the Treasury to reconsider a TTR to "maintain the U.K's attractiveness to international investors while ensuring fair contributions to the public purse."

Lesperance, who also contributed to the FIFB's proposals, noted however that it would have been politically challenging for the government to be seen bowing to pressure from lobbyists.

"If they'd gone for the tiered (system), there would have been howls that you've given into the fat cats," he said.

In addition to the non-dom changes, private equity managers will now pay a higher rate of capital gains tax (CGT) on carried interest — 32% up from 28% — reducing their share of profits when they exit investments. It came alongside a hike in the higher rate of CGT for other assets from 20% to 24%.

Other measures aimed at the wealthy include an increase to stamp duty on the purchase of second homes, the addition of value added tax (VAT) on private school fees, and a 50% increase on air passenger duty on private jets.

RBC Wealth Management's senior director of wealth planning, Nick Ritchie, was among those last week who blasted the additional measures, describing them as further exacerbating a wealth exodus.

"The increased air passenger duties on private jet trips will be a very small price to pay as they [non-doms] rush through the departures lounge and extricate themselves from the UK altogether," Ritchie said in a statement.

However, Lesperance ceded that the government didn't go as far as it might have, noting that fleeing wealthy had "dodged a bullet" by not being charged an exit tax, a levy on all of their realised gains — at least for now.

"I still think exit tax could be a tool in the toolbox. That could be the next thing," he said.