Wealthy leave Britain ahead of proposed tax changes for foreigners

London, Monaco, Italy, Switzerland, Dubai. These are just a few of the destinations trying to lure the UK’s wealthy ahead of proposed changes to the country’s divisive tax system.

Nearly two-thirds (63%) of wealthy investors said they planned to leave the UK within two years or “soon” if the Labour government went ahead with plans to scrap the colonial-era tax break, while 67% said they would not have migrated to Britain in the first place, according to a new study from Oxford Economics, which assesses the impact of the plans.

The UK’s non-dom system is a 200-year-old tax rule that allows people who live in the UK but are domiciled elsewhere to avoid paying tax on overseas income and capital gains for up to 15 years. As of 2023, an estimated 74,000 people had this status, up from 68,900 the previous year.

Last month, Labour set out plans to abolish the system, expanding on its election manifesto pledge and intensifying previous proposals by the previous Conservative government to phase out the system over time. It comes as Prime Minister Keir Starmer pledges to improve fairness and support the public finances, with further announcements expected in the Autumn Budget statement on 30 October.

Chancellor Rachel Reeves has said scrapping the scheme could generate £2.6 billion ($3.45 billion) over the next government’s term. However, research by Oxford Economics, produced earlier this month in collaboration with lobby group Overseas Investors for Britain, estimates the changes will cost taxpayers £1 billion by 2029/30.

CNBC reached out to the Treasury Department for comment, but did not immediately receive a response.

“We are sounding the alarm that this is a dangerous time,” Macleod Miller, CEO of Overseas Investors UK, told CNBC by phone. “If the government doesn’t listen, it will put revenues at risk for generations.”

Under the proposals, the concept of “residency” would be abolished and replaced with a resident-based system, while the number of years in which money earned abroad is not taxable in the UK would be cut from 15 to four years.

Individuals will also have to pay inheritance tax after 10 years of residence in the UK, and will remain liable for it for 10 years after leaving the country. They will also be prevented from avoiding inheritance tax on assets held in trusts.

However, Macleod Miller, a private wealth practitioner who launched a lobby group in response to the proposals, said the changes would hinder wealth generation and called instead for a graduated tax system.

According to a study by Oxford Economics, which surveyed 72 non-residents and 42 tax advisers representing 952 other non-resident clients, almost all (98%) said they would emigrate from the UK sooner than previously planned if the reforms were implemented. The 72 non-residents surveyed were said to have invested £118m each in the UK economy.

The majority (83%) cited inheritance tax on their global assets as the main reason for leaving the country, while 65% also cited changes to income tax and capital gains tax.

This comes as other countries are rethinking their tax systems to encourage wealthy investors.

Switzerland, Monaco, Italy, Greece, Malta, Dubai and the Caribbean island of the Bahamas are among the most attractive destinations for wealthy investors, according to industry experts and agents CNBC spoke to.

“Wealthy investors now have a lot of options, and a lot of investors are competing for those options,” Helena Moyas de Fortun, managing director and head of Europe, Middle East, Africa and Asia Pacific at Christie’s International Real Estate, told CNBC.

Moyas de Fortun, whose team advises clients on international relocation, said Labour's plans were the latest in a series of political developments that have shaken the UK's reputation as a safe haven in recent years.

“It’s just another blow,” she said. “I’m not sure if they’re all going to leave, but they’re definitely wondering and taking their time to see what’s changing.”

A record number of millionaires are set to leave the UK this year, according to a June report by immigration consultancy Henley & Partners, which cited July’s general election as adding to a period of political volatility following Brexit. Britain is expected to lose a net 9,500 high-net-worth individuals in 2024, more than double the 4,200 lost last year.

“It’s definitely a big risk,” Markus Meyer, CEO of real estate investment firm Mark, told CNBC of the changes to Monaco’s real estate market last week. “Markets are very fluid these days. It’s easy for people to move homes. It’s easy for people to move businesses.”

Alternatives for the ultra-rich include unlimited exemptions from inheritance tax in Monaco, Malta and Gibraltar, and no income, capital gains and inheritance tax in Dubai. In Italy and Greece, flat tax systems allow the wealthy to avoid paying taxes on their worldwide assets for an annual fee of €100,000 for up to 15 years.

Last month, Italy doubled its fee for new arrivals to 200,000 euros ($223,283) in a move its economy minister said was aimed at avoiding “financial advantages” for the wealthy. But McLeod-Miller said the system was likely to remain attractive to the top 1 percent even with a slight rise in fees.

“Other countries are sensing the fear and are actively promoting their jurisdictions and attracting their investments and families,” said McLeod Miller.

“Italy is one of those countries that court the wealthy and believes that treating them well will contribute to its growth,” he added.

This is also having an impact on the UK luxury property market. James Myers, director of London-based luxury estate agency Oliver James, has seen a surge in sales activity in anticipation of the Labour election in July. But now, around 30% to 40% of clients are cutting their asking prices to speed up the sale.

“A lot of people are worried. They’d rather get out now before it’s too late,” Myers told CNBC by phone, adding that many of Myers’ millionaire and billionaire clients have already started settling in Monaco and Dubai, and Italy has also recently become “a thing.”

Transactions in London's prime residential market, which covers homes worth £10 million and above, fell by 22% in the year to July compared with the previous 12 months, according to full market data published by estate agency Knight Frank on Wednesday.

The most noticeable decline was in properties worth over £30m, with just 10 sales compared to 38 the previous year, which the report put down to higher buyer appreciation.

Stuart Bailey, head of London luxury sales at Knight Frank, pointed out that uncertainty over the autumn statement has now replaced uncertainty over the election, with foreigners no longer the only group spooked by Labour's expected tax changes.

The UK’s ultra-wealthy, who are typically active in the luxury property market, are also awaiting potential changes to capital gains tax and inheritance tax. This comes in the wake of the introduction of VAT on private schools.

“Non-residents are a segment of that very distinct market, but they are not the be-all and end-all,” Bailey said by phone.

But Bailey pointed out that this would create opportunities for other investors. US citizens, who are already subject to US tax on their worldwide assets, and so-called 90-day residents, whose annual stay in the UK falls below the tax threshold, could ultimately benefit from reduced competition.

“American buyers, especially those with a lot of cash, would be crazy not to think now is a good time to buy,” he said.