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

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.

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.—Reuters