UK calls the bluff of ultra-rich foreigners threatening to leave the country

The Labor Party was criticized by wealthy groups keen to avoid harsh treatment in its first budget. Last week the government made clear it had made its choice: private equity executives were largely exempt from liability, but non-households would pay billions of pounds more.

Chancellor of the Exchequer Rachel Reeves on Wednesday (Oct 30) committed 40 billion pounds (S$68.6 billion) in additional taxes, which she said was needed to restore public finances and investment in services. Overall, he received lukewarm support from the business world.

For private equity, the wide-ranging tax rises were seen as favorable – especially compared to Labour’s hostile signals to the sector in advance. The rise in interest duty from 28 per cent to 32 per cent will affect around 3,100 people working in investment management and raise an additional £300 million by 2030, according to the government.

At the other end of the scale, one of the biggest money-raising measures was the removal of non-resident rules, which is expected to bring in around £12.7 billion until 2030. The government said about 25,000 people would be eligible for four years of tax payments. foreign income benefits, while 9,300 people will not be eligible – and officials have said at least a thousand are expected to leave the country.

After the Labor Party won the general election in July, new Prime Minister Keir Starmer laid the groundwork for a Budget that will be particularly painful for those with the broadest shoulders. While ministers spent the summer debating the economic damage caused by the previous government, they raised concerns about a sharp rise in the tax burden on the wealthy.

“The Chancellor’s time in the control room reflected the Prime Minister’s view that those with the broadest shoulders should bear the greatest burden – we now have some clarity on what this Government means by ‘broad shoulders’ , said James Cook, private client partner. at the law firm of Russell Cook.

Positive result

There was still quiet celebration inside private equity firms. There is still consultation to be done on issues such as how much managers invest in their own funds and how long they must hold investments to show they are truly risking their own money. Currently, only two out of five loan recipients co-invest, according to the Center for Tax Analysis.

From April 2026 there could be further changes as a result of the consultation, while the tax rate will rise to 34.625 per cent as it will include national insurance for the first time, although the government has said it will only tax 72.5 per cent of the carry, Michael Graham, Tax partner at the law firm DLA Piper, made calculations based on Treasury documents.

This means the carry tax will rise by four percentage points, in line with the increase in the basic capital gains tax, with only a small increase thereafter – a very positive result, Graham said.

Graham said the changes look particularly good for credit funds, which typically pay a combination of income tax and interest tax and will move to a lower fixed rate under the changes. But venture capitalists are less well off because their 28 percent rate will rise and they don’t appear to benefit from other changes, he said.

“The increase is the minimum the government will agree to,” he said, especially after the Labor Party has repeatedly signaled the rate would rise. However, the carry will be treated as income tax and could rise further in the future, he said.

“We have more confidence today than we did yesterday before the budget announcement,” Michael Moore of the British Private Equity and Venture Capital Association told Bloomberg Radio on Thursday. He stressed that his members have funds that can be spent on British projects. “In terms of what we invest in – and there is $178 billion of dry powder revenue available to use – we typically invest 50 per cent of that here in the UK.”

This capital could prove useful in Labour’s promise to unleash a wave of private funding into large-scale public projects. Starmer used an investment summit last month to unveil £63 billion of new and already agreed investment, while declaring economic growth and wealth creation to be the cornerstones of his government.

Leaving

For wealthy foreigners who live in the UK and do not have permanent residence status, the budget has been tighter, mainly because they have pushed ahead with plans to transfer their overseas wealth into the inheritance tax regime over time. It’s not an “exodus,” Amanda Tickel, global tax policy lead at Deloitte, told Bloomberg Radio, but the thought of their descendants paying death tax in the UK is daunting for some.

The Labor Party did not succumb to lobbying for a new tiered system and instead stuck to plans for a community-based programme. “The government is playing politics with foreign investors and the economic result will be a stretched Liz Truss budget,” said Leslie MacLeod Miller, chief executive of Foreign Investors in Britain, which has campaigned for a more generous regime.

Some of the richest people would rather leave the country than see their global assets suffer. The Office for Budget Responsibility (OBR), which scrutinizes state spending data, estimates that between 12 and 25 percent of those not eligible for the non-dom replacement system emigrate – that is, about 1,100 to 2,300, although it is impossible to predict how many people abandoning their homes because of taxes is difficult.

The changes show Labor believes many of the country’s richest foreigners are bluffing by threatening to leave the country. While cities such as Abu Dhabi and Milan are desperately courting them with a raft of tax breaks, officials have long said it will be harder for non-domestic people to leave London than they think.

“I remember asking HMRC (His Majesty’s Revenue and Customs) officials: ‘You can’t tell me, but could you just Google the top 50 companies and see if their children are of school age?'” Andy King, who was a member of the OBR until last year, said at a Bloomberg event on Thursday. “Is it likely that they will move?”

However, according to Alex Henderson, a tax partner at PwC, officials have thought through the plan and provided plenty of details to support it. The government is trying to persuade the rich to take their wealth ashore and spend it in the UK, offering it as a way to simplify their arrangements, which may appeal to some.

But making the changes is complex and costly, and there would be “significant concern” that non-UK wealth could be subject to inheritance tax, Henderson said.

The OBR’s forecast that a quarter would go is higher than its forecast of a fifth in March, when former Conservative chancellor Jeremy Hunt outlined similar plans.

If Labor upset the balance, it would be “terrible news” for the country, according to Dominic Lawrence, a partner at Charles Russell Speechlys.

Farm land

Labor is not simply extending the inheritance tax to non-households. There have also been protests over the inclusion of agricultural land worth more than £1 million in the tax. However, Dan Neidle, founder of Tax Policy Associates, said only 500 farms claimed more than £1 million in aid in 2022 and couples could claim benefits to reduce that figure further.

Another way to pass money on to the next generation—through retirement savings—is also becoming increasingly difficult. The government estimates that around 49,000 pension homes a year are facing bills. These include 10,500 people whose pensions exceed the inheritance tax threshold and 38,500 people who will now face an additional bill.

Steve Webb, a partner at pensions company LCP and a former pensions secretary, said the process would be a “nightmare” for bereaved people. BLOOMBERG