The Labour government’s potential expat exit tax will drive foreign direct investment outside of the UK, according to Vanesha Kistoo, head of the French desk at Blick Rothenberg.
Chancellor Rachel Reeves is being urged to introduce CGT exit charges on people when they are leaving the UK in the upcoming October Budget.
The idea came from think tank Resolution Foundation which said CGT was “ripe for reform”.
It added: “This is because rates are unjustifiably lower compared to those on other forms of income. For example, employment income faces a top rate of tax of 53 per cent on their earnings, but some capital gains face a top tax rate of only 20 per cent.”
The foundation also suggested aligning CGT rates for shares with dividend tax rates, taxing property capital gains like wages and applying it at death.
However, Kistoo believed the proposed exit tax was “deeply flawed” and did not make “fiscal sense”.
“It is likely to encourage wealthy expats to move to other countries, with one option being France,” she added.
Kistoo believed wealth expats would likely try to leave the UK before having to pay the exit tax or not come to the UK to begin with, meaning the exit tax take would reduce over time.
“As wealthy expats are only 1 per cent of the UK population, the overall exit tax take will also likely be small, meaning it will not do much to fill the ‘black hole’ in the nation’s finances, Labour has identified.
“When they leave, expats will go to countries where the tax regime is more favourable, especially in light of the UK’s new foreign income and gains regime, where tax relief only lasts four years.
“In comparison the French expat tax regime is much more attractive because it can be accessed by employees who were not French tax residents, including French nationals, for five years.
"The scheme also has an exemption for income tax on employment income and wealth tax on assets located outside France,” she explained.
Vistoo highlighted there was an exit tax in France but only applied to people who were leaving the country after being resident in France for six of the last 10 years.
She hoped the UK government would implement a similar timescale if it went ahead with the proposed tax.
Vistoo said: “If the UK government wants long term growth, not just a short-term tax take, they need to start to announce measures to continue to attract FDI into the UK. Which means attracting wealthy expats rather than giving them more and more reasons to go elsewhere.”
alina.khan@ft.com
