Senior economists and think tanks have urged the UK Chancellor of the Exchequer, Rachel Reeves, to implement an “exit tax” on wealthy individuals leaving the country, aiming to raise up to £500 million annually. The proposed tax would target rich entrepreneurs and investors who currently move overseas before cashing in their capital gains, avoiding UK taxes entirely. The proposal, which mirrors policies already enforced by countries such as the US, Canada, and Australia, seeks to stem a rising tide of wealthy Britons relocating to tax havens and depriving the government of vital tax revenues.
A report from the Centre for the Analysis of Taxation (CenTax) highlights the urgency of this measure. Their analysis shows that in the year leading up to April 2024, the UK experienced a significant outflow of £5.1 billion in shareholder value due to wealthy individuals emigrating. This has resulted in at least £500 million in lost capital gains tax revenue. The economists behind the report, including Arun Advani, Andy Summers, and Cesar Poux, have joined other prominent voices, such as the Institute for Fiscal Studies (IFS) and the Resolution Foundation, in calling for reforms to address the situation.
The UK, unlike many of its international peers, does not currently have an exit tax. This has made it an attractive jurisdiction for high-net-worth individuals who seek to avoid capital gains tax (CGT) by relocating abroad before realizing their gains. For example, under current laws, a wealthy individual could move their assets overseas and liquidate them without paying any UK tax on the profits, even though those gains may have accumulated while they were UK residents.
Countries like France, Germany, and the United States have long implemented exit taxes to prevent this kind of tax avoidance. In the US, for instance, emigrants are charged a CGT ranging from 20% to 30% on their unrealized capital gains at the time of departure. France imposes a similar tax at 30%, while Germany applies an effective CGT rate of 27%. The UK’s CGT, currently set at 20% on most assets, remains competitive on an international scale, but the absence of an exit tax means it is losing out on a significant source of potential revenue.
“Charging CGT on people who leave the UK is not about punishing them for leaving,” says Andy Summers, CenTax director 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.”
The growing chorus of economists advocating for an exit tax points to the missed opportunities in recouping tax revenue from the wealthiest individuals. According to CenTax’s report, the top 10 wealthiest leavers in the year leading up to April 2024 accounted for 73% of the potential tax revenue from lost capital gains. Three-quarters of the capital gains in that period were attributable to just 10 individuals with shareholdings valued at over £4 billion.
The call for an exit tax comes at a critical time for the UK government. With a budget deficit of £22 billion looming and economic growth sluggish, the Chancellor is under pressure to balance the books without stifling wealth creation. Reeves, who is scheduled to unveil her first budget on October 30, is exploring ways to generate additional revenue to fund public services. She has yet to rule out potential CGT hikes but is treading carefully to avoid alienating the country’s wealth creators and investors.
“We are addressing unfairness in the tax system, so we can raise the revenue to rebuild our public services,” the Treasury said in a recent 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.”
Non-domiciled residents, or “non-doms,” have long enjoyed preferential tax treatment in the UK, where they are allowed to pay tax only on their UK earnings and not on overseas income or capital gains. Reeves’ Labour Party has pledged to overhaul this system, a move that has been met with both support and concern. Critics warn that eliminating the non-dom regime could drive more wealthy individuals to emigrate, further exacerbating the tax revenue shortfall.
The exit tax proposal has garnered attention as a potentially effective way to retain revenue from high-net-worth individuals, even if they choose to leave the UK. By levying the tax on unrealized capital gains at the time of departure, the government can ensure it collects taxes owed on gains accrued while the individuals were UK residents.
Several other countries, including Denmark, Finland, Ireland, and Spain, also levy taxes on capital gains when citizens emigrate. CenTax’s report underscores that implementing an exit tax would bring the UK in line with these nations and reduce incentives for individuals to move abroad purely for tax reasons.
David Lesperance, founder of the international tax advisory firm Lesperance & Associates, agrees that an exit tax is a viable solution. “In contrast to a wealth tax, an exit tax is easy to implement and enforce; ‘one and done’; has proven workable; and seen to be politically palatable as it captures the capital gain that the individual experienced while living in the country,” he wrote in a LinkedIn post last month.
Lesperance also noted that some wealthy individuals are already preparing for potential changes to the tax regime. In an email to Bloomberg, he revealed that several of his clients were considering establishing non-resident status before October 29, in anticipation of possible exit tax legislation. “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 explained.
The Liberal Democrats have also expressed interest in CGT reform, suggesting that the government could raise £5 billion annually by making changes to the current system. However, the party has yet to officially endorse an exit tax as part of its platform.
Despite its growing support, the proposal to introduce an exit tax is not without its critics. Some argue that imposing such a tax could deter wealth creators from basing themselves in the UK in the first place. The Adam Smith Institute, a free-market think tank, recently warned that Reeves’ broader tax reforms could contribute to a decline in the share of millionaires in the UK population, which it estimates could fall to 3.62% by 2028 from the current 4.55%.
There are also concerns about the broader message that an exit tax might send to investors and entrepreneurs considering the UK as a base for their operations. If the tax environment is perceived as overly punitive, some fear it could stifle innovation and economic growth in the long term.
Nevertheless, supporters of the exit tax maintain that it is a fair and necessary measure to address the imbalance in the tax system. CenTax has proposed several safeguards to ensure that the tax would primarily target the wealthiest individuals. One such measure would be to “rebase” the value of an individual’s assets upon their arrival in the UK, ensuring that the tax is only applied to gains realized while they were UK residents. Additionally, the proposal suggests exempting individuals with gains below £1 million from the tax altogether.
