With an increase in UK capital gains tax (CGT) rates in the government's forthcoming Budget on 30 October looking more of a certainty, some commentators are suggesting this may also represent an opportunity to introduce a CGT exit charge, say RSM's Jackie Hall and Chris Etherington.
The rationale is that this might limit the loss of any tax revenues arising from a potential outflow of wealthy individuals and entrepreneurs from the UK to countries perceived to have more favourable tax regimes.
Currently, individuals deciding to do so do not suffer any tax charge for simply leaving the UK. However, a precedent for such a charge already exists. Limited companies already suffer a corporation tax charge on unrealised gains, based on an uplift to market values of relevant assets, when they become non-resident.
A similar charge applies when a trust becomes non-UK resident, based on a deemed disposal and reacquisition of chargeable assets at market values. The latter charge was the subject of a European Court of Justice case on the grounds the legislation unjustifiably restricted freedom of establishment; as a result, the legislation was subsequently amended to include a deferral provision, but the basic exit charge still remains.
With such precedents already in place, there is an argument for an exit charge to apply to individuals also. Many other countries in the G7 also already impose such a tax charge on leaving, such as Canada and Australia. Why then has the UK not already taken a similar path?
Put simply, one reason is that there is no need to lock the UK’s exit door if there are not many people using it. There are undoubtedly some high-net-worth individuals who have emigrated and not paid CGT on a subsequent disposal of assets. However, the historic view of the government is likely to have been that the numbers of individuals deciding to emigrate was not so large as to justify the complexities a CGT exit charge might bring.
In our experience, there has been a spike in interest in emigration planning from the UK, with concerns about CGT rates undoubtedly acting as a catalyst, but often not the only reason. Nevertheless, if there is a relatively modest increase in the main rate of 20% to, say, 24% then it is hardly likely we will see an exodus of entrepreneurs in response.
Part of the rationale for an exit charge appears to be that it would help secure tax revenues if CGT rates were increased in line with income tax rates. That presents a contrast to countries like Canada and Australia which offer significant discounts on CGT rates against income tax rates.
An exit charge with a low barrier, in the form of a lower or discounted CGT rate then, may have a very different behavioural response to one with a high barrier. We shall be able to see how this plays out internationally with Norway’s anticipated exit charge changes which will seek to apply a rate close to 38%.
Whilst an exit charge, along with a high CGT rate, might act as a deterrent to people emigrating, that does not necessarily mean that CGT receipts would increase as a result. We have written previously about how taxpayers might respond to a high CGT rate. Pursuing substantial additional CGT receipts with an exit charge may be like chasing a mirage.
A whole host of other CGT rules may need to be changed alongside it to make it fair and workable. The danger is that we end up with a lot of additional complexity, with little in the way of additional tax receipts to show for it. What is also unclear is whether the possibility of a future tax charge will also deter individuals from settling in the UK in the first place.
Ultimately, the preference for now is likely to be to stick with the UK’s currently revolving door, rather than to apply padlocks to it. The experiments of other countries like Norway may be closely observed