Senior economists and think tanks have urged the Chancellor of the Exchequer Rachel Reeves to introduce an “exit tax” on the wealthy to raise as much as £500 million a year and discourage departures.

Rich entrepreneurs and investors in the UK are currently able to move overseas for tax purposes before cashing in capital gains, with as many as three quarters re-domiciling in havens where they pay no tax at all, according to a report from the Centre for the Analysis of Taxation. Such a policy — which Australia, Canada and the US already have — would reduce incentives for wealthy individuals to emigrate in response to other tax changes, the group said.

CenTax’s analysis of Companies House data showed that there was an outflow of £5.1 billion in shareholder value in the year to April 2024 as UK nationals moved overseas. That amounted to “at least £500 million in foregone capital gains tax revenue,” it said.

The proposal from CenTax’s Arun Advani, Andy Summers and Cesar Poux follows similar suggestions from the Institute for Fiscal Studies and the Resolution Foundation, and comes as Reeves seeks to close a mid-year deficit of £22 billion without scaring off Britain’s wealth creators. 

Some high-net-worth individuals are considering relocating from the UK, prompting Reeves to consider watering down her plans for wealthy “non-dom” foreign residents in the UK. Such tax changes and a “hostile culture for wealth creators” could cause the share of millionaires in the British population to fall to 3.62% by 2028 from 4.55% now, the Adam Smith Institute estimated in a new report based in part on UBS/Credit Suisse wealth reports.

Reeves hasn’t ruled out a potential increase in the CGT, which is currently set at 20% on most assets, when she unveils her first budget on Oct. 30.

“We are addressing unfairness in the tax system, so we can raise the revenue to rebuild our public services,” the Treasury said in a statement. “That is why we are removing the outdated non-dom tax regime and replacing it with a new internationally competitive residence-based regime focused on attracting the best talent and investment to the UK.”

Other countries that charge capital gains tax on emigrants include Denmark, Finland, France, Germany, Ireland, Japan, Luxembourg, the Netherlands, Norway, South Africa, Spain and Sweden. In France, the rate is 30%, Germany discounts some of the gains for an effective rate of 27%, and the US charges it at between 20% and 30%. Within the Group of Seven, Italy is the only country other than the UK that doesn’t have an exit tax.

“Charging CGT on people who leave the UK is not about punishing them for leaving,” said Andy Summers, director of CenTax and associate professor at the London School of Economics. “It’s simply saying, ‘You need to pay your bill on the way out.’ Most of the UK’s international peers already do this, and there is no reason why the UK couldn’t, as well.”

While critics of the proposal say it could deter wealth creators from basing themselves in the UK, even tax experts argue that it would be a preferable reform to other CGT changes. The Liberal Democrats proposed raising £5 billion a year by reforming CGT in their election manifesto.

David Lesperance, founder of international tax advisory firm Lesperance & Associates, told Bloomberg that he had seven clients with a “significant amount” of unrealised capital gains. “They are going to put themselves in a position to claim UK non-residence before Oct. 29, should an exit tax (worst-case scenario) be applicable for anyone who becomes non-resident after that date,” Lesperance said in an email. 

CenTax’s proposal would “rebase” the value of the asset on arrival to ensure any tax was charged purely on the capital gains while the individual was in the UK. The government could also target it at the very rich by exempting anyone with gains below £1 million. The research found that the top 10 wealthiest leavers each year account for 73% of potential revenue.

In the year to April, three-quarters of the gains came from just 10 people with shareholdings worth over £4 billion, said Poux, CenTax.

  - Bloomberg