Exit tax (for a Country)

“Wake from your sleep… Today we escape, we escape”

Look, we all know the stop-clocked budget speculations. How many times have we heard about higher rate tax relief on pensions being removed? Or replaced by a single rate of relief?

In fact, professors of horology are having to adjust their theory as we speak.

But we don’t hear of “exit taxes” often.

Should we be worried?

Well, let’s channel our inner Thom Yorke and Radiohead. Dually renowned for their positive spin on subject matter and their love of speculating about tax.

Indeed, I’m unreliably told their hit from Pablo Honey, Creep, was about their tax adviser.

“Pack and get dressed… Before all hell breaks loose”

There have been a couple of well cited reports saying that millionaires are leaving the UK in droves.

As I have said before, the Tories told us ad nauseam about the “small boats problem”.

However, if the various surveys / reports are to be believed, Labour clearly has a small jets and yacht problem.

Can you stop people, at least fiscally speaking, leave the UK?

There are a couple of things:

• (1) HMRC might simply patrol the fiscal border more tightly – eg make more enquiries into whether the statutory residence test is being applied properly;

 

• (2) We might see a tightening of the rules. Effectively, all of the tests in the SRT can be reduced to a day counting exercise. However, we’re already pretty stingy.

 

An exit tax would represent a much more aggressive move – essentially a skim on the assets of those leaving the UK. This might be an exit charge representing capital gains tax on unrealised assets at the time of departure.

There were huge howls of anguish and gnashing of teeth when Norway announced a tightening of its existing exit tax of 37.8% on unrealised gains following departure from the country.

There are a number of other EU countries with exit taxes – including Spain, Estonia, Denmark, France and Germany (albeit none as spicy as Norway’s)

As Roger Ver recently found out to his cost, the US has a similar tax on giving up one’s citizenship (the US, famously, having a citizenship based tax system. But let’s not give Rachel Reeves any further ideas, OK?)

“Breathe, keep breathing… Don’t lose your nerve”

A common message from advisers is don’t hang around for a wealth tax. By the time its introduced, it’ll almost certainly be too late.

That is, of course, difficult to argue with.

However, personally, I would be surprised to see an exit tax. There are a couple of reasons for this.

Firstly, the clamour for an exit tax seems to be mainly coming from a group of economists who were, just months ago, arguing that no one would leave the UK as ‘tax havens’ were a real bore. However, the UK isn’t merely competing with rocks in the sea. The UK is competing with the Italy’s and the UAE’s of this world.

Yet now, the very same people are frothing at the mouth for an exit tax. Go figure.

Secondly, we already have the temporary non-residence rule which covers some of this ground already. Of course, this rule is more limited in that it seeks to take a rake from those who (1) became non-resident (2) sold assets they owned when they left the UK but (3) did not remain outside of the UK for five years.

As such, it stops short term sojourns offshore to save CGT.

“Sing us a song… A song to keep us warm”

Of course, an exit charge which takes a skim of your assets on departure – whether permanently or temporary – would raise more and accelerate the tax receipts when compared to the temporary non-residence rule.

With pensioners reconciled to losing their winter fuel allowances, as a political headline, this will play well.

However, the Labour party is already seemingly finding that the real world is more complex than selling platitudes from the back of a van. Electioneering, anyone?

This is because finding new ways of raising taxes isn’t that straightforward because of behavioral changes.

Ultimately, this is the reason why I don’t think we will see it any time soon. It would surely send out a terrible message to those considering coming here (and presumably we need some fresh wealth coming to the UK?). I suspect it would mean that people would very much have this rule at the forefronts of their minds when they come to the UK (or, more pertinently, decide not to come to the UK).

It appears as though Labour are going to row back from the worst features of the non-dom changes and their other manifesto promise to tax private equity returns at the higher levels of income tax.

So why would they take another fiscal shot in the dark on with an exit tax?

In short, I don’t think they will.

 

 

“And you can laugh a spineless laugh… We hope your rules and wisdom choke you”

Steady Thom, play nice.

Finally, there would need to be some administrative tweaks. For example, one would also assume that there would need to be a rebasing of assets when someone takes up residence in the UK. Such that only gains whilst resident are taxable. I recall this was the position in Canada.

That said, it is worth stating we do have exit taxes for trusts and companies. So none of this is insurmountable.

Although we don’t want to see anyone ‘choking on the rules’, the legislation might get a little bit more choked up if this goes ahead.

“We hope that you choke, that you choke”

Guys, give it up with the choking already. I’ve saved you once.

In summary, I cannot see that the UK will introduce an exit tax. It would be a panic move and send out a truly horrible message. It appears that the government and treasury are slowing digesting the issues around non-doms and private equity. As a result, it would seem odd if they pressed the button on this one.

[Exit stage left]