The UK's wealthy individuals are experiencing financial strain due to Labour's budget that includes tax increases.

• The wealthy in Britain are experiencing financial strain due to the tax increases implemented by the Labour government in their budget.
• The U.K.'s non-dom regime has ended, and inheritance tax has been broadened to include worldwide assets, while private equity bosses and second homes have seen their taxes increased, as confirmed by Finance Minister Rachel Reeves last week.
• Many wealthy individuals are now following through on their promises to leave the U.K. as they believe Labour did not take heed of warnings about a wealth and investment exodus.

The wealthy in Britain are experiencing financial strain due to the Labour government's tax hikes in the budget, despite warnings of a wealth and investment departure.

The UK Finance Minister, Rachel Reeves, announced last week that the non-dom regime for wealthy foreigners will be abolished from April 2025, and all long-term residents will be subject to inheritance tax (IHT) on their worldwide assets, including those held in trust.

New levies were imposed on private equity bosses, private schools, second homes, and private jets as part of a broader clampdown on the upper echelons.

Reeves defended her £40 billion tax-hiking budget, stating it was necessary to address the country's financial deficit, stimulate growth, and ease the strain on "working people." However, many affluent individuals argue that they are now being targeted and are fulfilling their pre-budget promises to depart the U.K., along with their investments.

"According to David Lesperance, founder and principal at international tax and immigration advisory firm Lesperance and Associates, there will be a significant movement of people from London and the Times Rich List group, who could potentially leave en masse."

In the two days following Reeves' announcement, Lesperance reported receiving seven requests from clients to initiate their U.K. exit strategy and three new inquiries from affluent U.K. taxpayers seeking to depart before April. This is in addition to the preemptive moves taken by clients prior to and following the July 4 Labour election victory, he stated.

Non-doms face a major tax hit

The non-dom regime in the U.K. is a 200-year-old tax rule that allows individuals residing in the U.K. but domiciled elsewhere to avoid paying tax on foreign income and capital gains for up to 15 years. As of 2023, approximately 74,000 people have benefited from this status, an increase from 68,900 the previous year.

Reeves announced on Wednesday that she was replacing the "outdated concept of domicile" with a new "internationally competitive" residence-based scheme in the interest of fairness.

From April 2025, anyone who has been a tax resident in the U.K. for more than four years will be subject to U.K. tax on their foreign income and gains. New arrivals to the U.K. will receive 100% U.K. tax relief for their first four years, provided they have been non-resident for the last 10 years.

Inheritance tax (IHT) will apply to residents on their worldwide assets, while non-doms will receive temporary relief for money brought into the U.K. for up to three years.

The government predicts that the non-dom measures alone will generate £12.7 billion in revenue, in addition to the £21.1 billion forecasted by the OBR from earlier changes to the non-dom regime announced by the Conservatives in March.

During a post-budget press briefing on Wednesday, a Treasury spokesperson stated that we will remain extremely internationally competitive with a proper system in place.

According to Steven Porter, partner and head of tax disputes and investigations at law firm Pinsent Masons, the jury is still out on whether the measures will increase or decrease tax revenue in the long run, and the government should exercise caution to avoid driving people away.

Despite the release of the draft legislation, the Government can still establish a new non-dom system that caters to the needs of internationally-mobile individuals, according to Porter.

Fears of a wealth exodus

For weeks, lobby groups have been predicting an imminent wealth exodus under a hard-line approach from the chancellor, stating that jurisdictions such as Italy, Switzerland, and Dubai are "smelling the fear" and attracting Britain's super-rich.

The Foreign Investors for Britain (FIFB) group, established after Labour's election, presented a proposal to the government for an Italian-style tiered tax regime (TTR). This regime would involve wealthy non-doms paying a flat annual fee in exchange for tax exemptions on non-U.K. assets.

On Thursday, Leslie Macleod Miller, CEO of FIFB, criticized the government's plans, stating that they would lead to an "economic mire." He urged the Treasury to reconsider implementing a TTR to maintain the U.K.'s appeal to international investors while ensuring fair contributions to the public purse.

Lesperance, who also contributed to the FIFB's proposals, pointed out that it would have been politically challenging for the government to be seen bowing to pressure from lobbyists.

"If they'd implemented a tiered system, there would have been outcries that you've succumbed to the interests of the wealthy," he stated.

Further hikes on the super-rich

Private equity managers will now pay a higher rate of capital gains tax (CGT) on carried interest, which is 32% up from 28%, resulting in a reduction of their share of profits when exiting investments. This change was accompanied by an increase in the higher rate of CGT for other assets from 20% to 24%.

Other measures aimed at the wealthy include increasing stamp duty on second homes, adding VAT on private school fees, and raising air passenger duty on private jets by 50%.

Nick Ritchie, senior director of wealth planning at RBC Wealth Management, criticized the additional measures, stating that they would intensify a wealth departure.

Ritchie stated that the higher air passenger duties on private jet trips are a small price to pay for non-doms to quickly leave the UK through the departures lounge.

Lesperance conceded that the government did not go as far as it could have, acknowledging that wealthy individuals who fled had "escaped a bullet" by not being charged an exit tax, a tax on all realized gains - at least for the time being.

He suggested that an exit tax could be a useful tool in the future.