The UK may have reached a tipping point in wealth outflows, says Marc Acheson, Global Wealth Specialist at Utmost Wealth Solutions.
He examines the potential levers the UK Chancellor could pull in the context of a gloomy economic outlook as well as the impacts he is seeing following the measures announced at the Autumn Statement.
What could we see at the Spring Statement?
Rachel Reeves will present the Spring Statement on Wednesday 26th March. She initially pledged to keep to just one fiscal event a year with the Spring Statement being a routine update on the economic and fiscal outlook. Yet everything is moving in the wrong direction for the Chancellor.
The latest figures showed the UK economy contracted in January before the full effects of the rise in business taxes have even been felt and the Bank of England and others have downgraded forecasts. Any headroom the government had to meet its fiscal rules is now likely to have evaporated.
To raise taxes and cut spending now or come back later in the year….
As a result, to meet the tight fiscal rules the Chancellor has set, she may be forced to make more substantial announcements on tax and spending and turn the Spring Statement into an unwanted budget.
However, if she decides to stick to her pledge to have just one fiscal event each year, she may promise action in the Autumn to ensure the rules are met. Yet that could lead to months of speculation and uncertainty. Ultimately, the decision will come down to how much the Chancellor wants to stick to her ironclad rules.
What could tax rises look like?
If the government opts for tax rises, this could involve the freezing of allowances to raise revenues via fiscal drag rather than increasing headline rates. This could raise approximately £10bn over the course of the next few years. Additionally, lowering the threshold for the 45% income tax rate to £100,000 would pull more earners into the highest tax band without changing the actual tax rate.
The government also seems intent on pressing ahead with its plans to introduce inheritance tax (IHT) on pensions to ensure they are used as intended rather than as a means of wealth transfer. Other possible measures include the long mooted removal of higher-rate tax relief on pension contributions or a further reduction in the cap on pension commencement lump sums, should pensions remain in the spotlight. Additionally, significant cuts to cash ISA allowances could also be on the table.
What we are seeing among HNWs: the UK may have already reached a tipping point in wealth outflows
The UK may have reached a tipping point, with an accelerating exodus of wealth. Many HNWs, particularly resident non-doms or those who have been UK resident for more than four years and UK domiciled people, have already left and / or are preparing to leave. Countries such as the UAE, Italy, Switzerland, Portugal, Greece are competing aggressively to welcome families through a combination of flat taxes and lack of IHT.
One of the primary motivators for non-doms and their families leaving the UK since the October 2024 budget is the erosion of IHT protections on existing settlements. Many accumulated their wealth prior to coming to the UK and were able to shelter it under previous structures. With the removal of these protections on existing trust structures, they face IHT on an ongoing basis – both on the assets settled within the trust and upon leaving the UK. Additionally, if they have been UK resident for 10 years or more, any remaining assets in their estate will be subject to a 40% IHT charge upon death.
IHT at 40% really does make the UK an outlier compared to other jurisdictions.
More HNWs are likely to set sail
Not everyone can leave right now particularly those whose children remain in education. They are actively restructuring their wealth to mitigate the changes while they remain here. Crucially, no one publicly has suggested that these changes will result in them extending their time in the UK, so people are likely to leave at a greater rate than average in the coming years.
The new Foreign Income and Gains (FIG) regime will not stem this tide.
The new FIG regime, which allows people to bring offshore income and gains into the UK tax-free for four years, only serves those who don’t intend to stay in the UK long-term.
Without meaningful reversals or adjustments, the risk is that wealth will exit the UK permanently and it’s hard to see currently where we are attracting new wealthy individuals from.
