UK Budget: Nervous wait for British expats as tax hike looms

Spotlight on property and capital gains taxes points to wealth held by expats, non-doms and the affluent being hit by higher levies

British expats and non-doms are reviewing their UK tax positions in the run-up to Chancellor Rachel Reeves' first budget speech. Image: Nick Donaldson / The National; Getty Images

Chris Ball is something of a gatekeeper to the UK in his financial services business in the UAE, but right now his weathervane is pointing away from the homeland.

The managing director of Hoxton Wealth in Dubai, is warning changes in the October 30 budget could have the effect of reducing expectations of a lucrative return from UK interests. “The concerns are not just the possible raises in inheritance tax and capital gains tax, but other measures on workers' rights and penalties for property owners and a general impression that success and wealth is there to be taxed,” Mr Ball said.

Chancellor Rachel Reeves stands to deliver a budget on Wednesday that could serve up some surprises for British expats living aboard who still own assets, particularly property, in the UK, experts have said.

One of my clients said: ’London is nice, but it isn’t that nice'

David Lesperance,
adviser

The private property sector has seen an exodus of domestic landlords in recent years, as yield plunged while borrowing costs soared. Even though inflation and interest rates have fallen significantly in the past few months, areas such as the buy-to-rent market continue to struggle.

As a result, in the past week, private sector landlords have insisted that without tax breaks, rents will keep rising and the supply of available homes will keep falling, as landlords continue to sell up.

Property website Rightmove claimed average advertised rents have hit a record high because landlords are selling their assets. Its research showed 18 per cent of homes for sale were previously available for rent between July and August.

Leverstock Green, near Hemel Hempstead. Changes to stamp duty in the budget could affect the value of homes owned by British expats. PA Wire

Capital gains tax

Another major issue for expats to be aware of is the widely predicted increase in capital gains tax (CGT), which could apply to a range of asset sales, although it is thought there will be important exceptions. CGT raises about £15 billion a year for the Treasury, about 4 per cent of the total tax take, and it is a tempting area for any chancellor to tweak.

In the property sector CGT applies to the sale of second homes. Basic rate taxpayers currently pay 18 per cent on any gains they make when selling property, while higher and additional-rate taxpayers pay 24 per cent.

It is thought Ms Reeves may bring CGT in line with income tax rates. But some feel she may soften the blow by restoring indexation, which means capital gains are taxed only after inflation. Meanwhile, The Times recently reported that the government has decided to leave CGT levied on the sale of second homes and buy-to-let properties untouched, because of predictions that increasing it may end up costing more than it raises.

Many expats own UK shares and may be concerned about CGT liabilities on them. Prime Minister Keir Starmer has long emphasised that the budget will not “go after” working people, but he told Sky News this week that someone who works but also gets income from shares or property “wouldn’t come within my definition” of a working person. A spokesman later said that Mr Starmer meant a person who primarily gets their income from assets would not be considered a working person.

Nonetheless, Mr Ball told The National that when it comes to CGT on shares owned by expats, the situation may be somewhat different because “there is typically no capital gains tax to pay on shares in the UK for both interest earned and gains made upon sale. It is unlikely that this benefit would be changed in the budget, as it is written into the double taxation agreement between the UK and UAE.”

Chris Ball, managing director of Hoxton Wealth. Photo: Hoxton Wealth

Overall, there is a general feeling among Mr Ball's expat clients that Britain is becoming a more tax burdensome environment and some are reconsidering the long-term future of assets and businesses they have back in the UK.

“There has definitely been an uptick in the number of clients we are helping to either review and restructure their UK businesses or to move their entire life over to the UAE,” he told The National. “Many entrepreneurs have spent years building up their businesses and the value within them. With increased capital gains tax rates, they could see significant proportions of that built-up wealth potentially wiped out overnight.

“This has been a big concern to many of those we have been speaking with, resulting in conversations around tax residency planning.”

Non-doms

David Lesperance has never been busier. The international tax and immigration adviser is a former non-UK domiciliary (non-dom) – a UK resident whose permanent home for tax purposes is outside Britain. He has been helping people move in and out of Britain for more than 30 years.

But during the past six months, from when it seemed a foregone conclusion that Britain's Labour Party would win the general election, to that election win in July through to the build-up to next week's budget, he has barely been off the phone to his wealthy clients.

The writing has been on the wall for the UK's non-doms for many months. Earlier this year, Labour placed non-doms firmly in the tax plans in its election manifesto. For Mr Lesperance, the party's leader Keir Starmer also made the whole issue personal in its campaign by “going after Rishi Sunak’s wife”, because the then prime minister's spouse was herself a non-dom.

So, now the question is, exactly what is new Chancellor Rachel Reeves planning?

Akshata Murty, the wife of Britain's former prime minister Rishi Sunak, used to be a non-dom. Getty Images

“When it became increasingly obvious that Labour was going to win the election, clients started saying ‘let’s listen to the rhetoric’,” Mr Lesperance told The National. “One of my clients said: ’London is nice, but it isn’t that nice.’ That’s the group that is leaving – small in number, but large in revenue.”

That rhetoric, as far as the non-doms were concerned, was very different from when Labour won their last electoral landslide in 1997, following which Gordon Brown became chancellor. He made noises about changing the tax regime, but they soon faded away.

Ironically, it wasn't until years later when the Conservatives came back to power that the non-dom tax regime issue returned to the political agenda in a major way.

Non-domiciled taxpayers in the UK

Wealth and income

There are two basic types of non-doms and any changes to the tax regime would affect them in differing ways. One generally works in the financial district of the City of London, probably as a trader of some sort, drawing an impressive salary and bonus from a financial institution such as an investment bank. These are what might be described as income non-doms. As a rule, they tend to be under 50 years old and have a lot of what Mr Lesperance refers to as “life inertia”. This relates to the circumstances which keep them in the UK – home, children, schools and social networks.

The other type might be referred to as “wealth” non-doms. They are highly mobile with low life inertia in any one particular place, given they can maintain their wealth pretty much anywhere. They are not reliant on income of gains in any specific jurisdiction, because they borrow against their worldwide assets. This is the group which has the most incentive to quit the UK completely.

But, as Mr Ball points out, the non-dom tax status is a moveable feast, depending on the amount of time physically spent in the UK. “The mooted changes for non-doms have certainly caused some to change their habits, as being resident in the UK is not an in-or-out position,' he told The National. “They only need to change where they spend their days to shift their tax residency and with many being internationally mobile, this is not difficult to do.”

Aiming low and falling for flat

If a wealthy non-dom does decide to quit the UK, there is no shortage of places to go, which often end up competing with one another to attract ultra-high-net-worth individuals (UHNWIs). Indeed, it is no coincidence that as the Labour Party was securing power in the UK in early July, the new government in Portugal announced plans to reintroduce tax breaks for foreign nationals.

Lisbon, the capital of Portugal, has become more attractive for UHNWIs after the government changed the tax rules. Getty Images

Meanwhile, Italy has been the focus of much attention in the British press because of its flat tax scheme, which, despite doubling in August to €200,000, advisers still say is making the country an attractive option for the ultra wealthy. “I had one client who moved to Italy and he said of the €100,000 flat tax regime: ‘100k? That’s what I pay my UK accountants to file each year’. So, for him it was a line item on the budget,” Mr Lesperance told The National.

What is also driving wealthy non-doms to rapidly overcome their life inertia in the UK is the looming threat that the Labour government might introduce an exit tax. These are not uncommon in G7 countries and, indeed, the UK is one of the few countries that does not have one. An exit tax is really a capital gains tax (CGT) – if a wealthy entrepreneur sells his or her UK business after emigrating to a low or no-tax jurisdiction, there is no CGT to pay. It means successful businesspeople can emigrate from the UK to save tax, something they would have to pay a tax for if they were to do the same in Australia, Canada, the US, France, Germany, Japan, South Africa and others.

The City of London skyline. If a wealthy non-dom does decide to quit the UK, there is no shortage of places to go. Matthew Davies / The National

When the UK was part of the EU, an exit tax did not really make sense, because of the principle of free movement within the bloc. But post-Brexit, for some economists it makes sense for the UK government to implement some sort of CGT exit levy on those looking to emigrate. According to academics at the Centre for the Analysis of Taxation (CenTax), not having an exit tax costs the UK £500 million per year in lost CGT.

“Charging CGT on people who leave the UK is not about punishing them for leaving,” said Dr Andy Summers, associate professor at the London School of Economics and director of CenTax. “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.”

‘Golden geese’

Overall, many argue that measures such as scrapping the non-dom tax status and bringing in an exit tax simply serve to chase UHNWIs away, together with the other taxes they pay and the jobs upon which their wealth depends. Essentially, by banishing the geese that lay the golden eggs, the Adam Smith Institute argued in a recent report that more than 23,000 jobs could also be lost in the UK if tens of thousands of non-doms were to quit the country. “When you have a small number of ‘golden geese’ leave, it has a huge asymmetrical impact on the total tax revenue,” Mr Lesperance said. “When you have a small number of UHNWIs leave, not only are you not going to get the windfall, you’re going to incur a major loss on your annual recurring tax revenue.”

Meanwhile, an Oxford Economics survey of almost 75 non-doms, with an average investment in the UK of £20 million each, found that more than 80 per cent said Labour’s inheritance tax changes were a major reason for emigration. The survey also maintained that a tiered tax system with a flat rate charge could avert a mass exodus of non-doms.

Non-doms and their plans to emigrate from the UK

Many of Mr Lesperance's ultra-rich clients have already left, and the remainder have plans in place to leave by the end of the financial year next April, depending on what they hear Chancellor Reeves say on Wednesday.

“By next Friday,” he told The National, “I’ll find out if my clients had a happy Halloween or if they’re going to be suffering from the Nightmare at Number 11 Downing Street.”