When the Rolling Stones left the UK for the South of France in 1971, they arguably became the world’s most famous tax exiles.
Five decades on, the headlines are filled with suggestions that entrepreneurs and investors are packing their bags.
But are we really witnessing a new wave of rich, mobile ‘rolling stones’?
We are all now familiar with the fact the Autumn Budget confirmed changes to capital gains tax (CGT) rates, business asset disposal relief (BADR) and inheritance tax (IHT).
These changes are part of the government’s efforts to raise much-needed revenue to fund public services. The idea is to get people who earn money off what they already own to foot more of the bill in a bid to avoid hikes to income tax.
A mandate for change
It is worth emphasising the UK public handed the government a clear mandate to tax the very rich – 78% of voters support an annual wealth tax on those with assets worth over £10m, including 77% of Conservative voters and 86% of Labour voters.
However, it is also fair to say many are broadly more supportive of those who become wealthy through creativity, hard work and skin-in-the-game risk-taking.
A poll commissioned for the 2020 book, The Rich in Public Opinion, captures this belief: entrepreneurs were the only group the majority thought ‘deserved to be rich’. Compare this with the proportion who thought property investors (27%), heirs (18%) and senior bankers (14%) deserved their wealth.
The government has nonetheless shied away from the hard-to-implement general ‘wealth tax’, instead putting focus on employers’ National Insurance and CGT. But tax policy is a notoriously blunt instrument – and one that can come with unintended consequences.
When we see columns already saying ‘good riddance’ to wealthy departees, we should pause to consider the broader economic implications.
What’s at stake?
The impact of some entrepreneurs leaving is hard to quantify, but the ScaleUp Institute’s 2024 annual review estimates fast-growing businesses represent 55%, or £1.45trn, of UK SME output, despite only accounting for 0.6% of the business population.
The truth is that, as tax rates rise, people who create economic growth, good jobs and innovations that benefit us all become more tempted to set up abroad. There are two key reasons why CGT rises are riskier in 2024.
The first is the complete normalisation of remote work. When CGT was first introduced in the 1960s, business owners were more or less a captive audience. The high-profile celebrity tax exiles I mentioned earlier were notable because they were unusual and, unlike founders and operators, had careers less dependent on the UK’s financial ecosystem, skilled workforce and stable legal environment.
Today, digital technologies mean, like many of us, entrepreneurs can run businesses from almost anywhere with a stable internet connection. For those planning a business sale in the near or medium term, moving abroad could realistically save them millions in taxes.
The second is that faith in the ability of governments to spend money sensibly has declined markedly. This is a sad, longer-term trend that cannot be blamed on the current government. The assumption tends to be that entrepreneurs eyeing Portugal or Dubai are greedy, when, in reality, their motivations are more complex.
Most absolutely want to give back, but many feel they could make a greater impact through personal philanthropy then via a higher tax bill.
Entrepreneur psychology plays a significant part here: these are people used to controlling businesses they built from nothing, businesses that often operated on very lean margins and resources in their early days.
The inefficiencies associated – rightly or wrongly – with public-sector spending are an anathema to them. Setting up their own philanthropic endeavours helps them feel confident their contributions are making a difference to the causes they care most about.
The tax tipping point
Though the Budget did target taxes and reliefs designed to help encourage entrepreneurs, it was to a lesser degree than many feared. CGT rates going up further in future Budgets is not off the cards, but aligning CGT to income-tax rates is not straightforward.
The Treasury’s own analysis showed CGT increases above the level we saw in the Budget would lead to less revenue being raised by 2027-28, as people’s behaviour changes. They either move, or hang on to assets for longer, knowing both governments and taxes will change again in the future.
Asset growth is also fundamentally different to income and typically carries an element of risk. Moving CGT rates up to income-tax rates would feel a tad unfair, without some sort of rebasing element or indexation. Indexation is where you only pay tax on the growth of an asset above inflation and was previously part of CGT (in some form) from 1982 until 2008.
Ultimately, the government’s challenge is to balance revenue needs with a tax policy that encourages people to stay and invest. As seen in previous decades, high taxes can drive even the most iconic figures away.
Today’s ‘rolling stones’ aren’t rock stars but are instead the creators of jobs, ideas and growth. Their desire to give back remains strong – but they want to do so on their terms.
Andrew McMillan is founding partner of Nova Wealth
