{"id":6575,"date":"2023-09-10T09:00:00","date_gmt":"2023-09-10T08:00:00","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=6575"},"modified":"2023-09-10T14:05:15","modified_gmt":"2023-09-10T13:05:15","slug":"sugar","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/09\/10\/sugar\/","title":{"rendered":"Why Alan Sugar failed to become a tax exile, and why so many others succeed."},"content":{"rendered":"\n
The Sunday Times has a remarkable story<\/a> that Lord Sugar tried to avoid tax by leaving the UK for Australia. The idea was that he’d cease to be UK resident, and so would escape \u00a3186m of tax on some very large UK dividends. <\/em><\/strong><\/p>\n\n\n\n Somehow neither Sugar, his team, or his advisers ever thought to do a simple Google search:<\/p>\n\n\n\n Which would have led them to this:<\/p>\n\n\n\n So the answer as to why Lord Sugar failed to become a tax exile is easy. The CRGA means that, as a member of the House of Lords, he would have been UK tax resident whether he lived in Basingstoke, Sydney or on the Moon. <\/p>\n\n\n\n It’s a fun story (not for Alan Sugar, and not for his advisers, who the Sunday Times says he’s now suing 1<\/a><\/sup>Most professional negligence claims settle well before reaching a court, but on on the face of it this looks like a slam-dunk. However, we don’t know all the circumstances, what questions were asked, and whether advice was preliminary or definitive. The advisers may also be able to point to limitations of liability in their standard terms – accountants often limit liability to \u00a31m (or thereabouts), even on very large transactions, and whether these limitations apply in a particular case is often a difficult question. Sugar would also have to show that, if he had been properly advised, he would have resigned his seat in the Lords, and then remained non-UK resident for five years – and demonstrating these kinds of counter-factual questions isn’t always easy<\/span>). But there’s a bigger question: why does the UK make it so easy to become a tax exile?<\/p>\n\n\n There is a longstanding debate in some circles on whether, and to what extent, people in general move in response to high taxes (often based around studies of US state taxes<\/a>). I confess this always seems a little unreal to me. Just to start: Sir Jim Ratcliffe<\/a> (Ineos),2<\/a><\/sup>The original version of this article included Toto Wolff<\/a>, the motorsport executive. I don’t think he really belongs in it – he left the UK<\/a> for Looking at the Sunday Times “Rich List”<\/a>, I’m struck by how few of those listed still live in the UK. Most of these people left the UK for a very specific reason. They built up a successful business, and were about to make a large amount of money from that business (perhaps by selling it; perhaps through a large dividend). They left the UK, sold the business (or received the dividend) and made a large tax-free gain\/profit. They became a tax exile.<\/p>\n\n\n There isn’t a loophole or trick – its just that, like almost all4<\/a><\/sup>“almost all” meaning “everyone except the US”. There’s a reason<\/a> the US is an outlier here.<\/span> other countries, the UK only taxes people who live here – who are “UK tax resident”.5<\/a><\/sup>There used to be a huge loophole – you could leave the UK on 4 April 2020, become non-resident for the 2020\/21 tax year and receive your massive gain tax-free, then fly back into Heathrow on 5 April 2022. That no longer works. There’s a special rule<\/a> to tax “temporary non-residents”. If you leave the UK but become UK resident again within five years, any capital gains you made during the five years are immediately taxable.<\/span><\/p>\n\n\n\n This is sensible and uncontroversial. The UK has no business taxing people who don’t live here.<\/p>\n\n\n\n It becomes more controversial if that Brit has spent her life in the UK growing a business, and is (say) sitting on an offer from someone to buy the business for \u00a350m. The UK has, by international standards, a pretty low rate of tax on capital gains – 20%. But if she leaves the UK and moves to a country that doesn’t tax capital gains then she’ll escape all tax on the \u00a350m. That used to mean going to a tedious tax haven like Monaco, but there are an increasing list of non-tax havens that don’t tax recent immigrants on their foreign gains – e.g. Australia, Portugal7<\/a><\/sup>Correction: Portugal would tax gains, but not dividends. So obvious ploy is to keep hold of the shares, but extract all the value via a dividend. Which amounts to the same thing, subject to a bit of messing around with distributable reserves<\/span> and Israel.8<\/a><\/sup>And the UK is in a similar category in the reverse case – the UK non-dom rules means that a foreigner coming to the UK is not taxed on their foreign gains, unless they remit them to the UK. That is less generous than Australia, Portugal and Israel, where the gains are exempt even if brought into the country.<\/span> <\/p>\n\n\n Absolutely. Many countries try to stop tax exiles, or limit the tax they avoid, with “exit taxes”.<\/p>\n\n\n\n Typically how this works is that, if you leave the country, the tax rules deem you to sell your assets now, and if there’s a gain then you pay tax immediately (not when you later come to sell). Sometimes you can defer the tax until a future point when you actually sell the assets or receive a dividend.9<\/a><\/sup>Often you have to provide some form of guarantee so you can’t just promise you’ll pay in future, and then scarper<\/span> And if your new home taxes your eventual sale, then your original country will normally credit that tax against your exit tax. Of course, it works out more complicated than this in practice because it’s tax, but the basic principle is both straightforward and commonly implemented in other countries. For example:<\/p>\n\n\n\n Why didn’t the UK create an exit tax years ago? We didn’t have capital gains tax at all until 1965, and it was easy to avoid until the 90s. After that, we ran into a big problem with EU law<\/a>, which greatly complicates<\/a> exit taxes – in particular by requiring an unconditional interest-free deferral of exit tax until an actual disposal of the assets. That enables a massive loophole for taxpayers to leave a country, and then extract value through dividends, rather than a sale. Germany is attempting to ignore this, and I expect that will not end well.<\/p>\n\n\n\n So one new freedom the UK has post-Brexit is the ability to impose our own exit tax that has no leaks, and which the CJEU can’t stop. 10<\/a><\/sup>Some tax nerds will worry that the UK’s many double tax treaties make this hard, because we often give up our right to tax non-residents on their capital gain. To which I say: easy, deem the tax to apply on the last day they were UK resident, so the treaty isn’t relevant. And then expressly override the treaty anyway, just to be safe. After all, treaties are supposed to be used to prevent double taxation, not to avoid taxation altogether.<\/span><\/p>\n\n\n\n (The UK has some exit taxes already. Companies migrating from the UK pay an exit tax. Stock options are subject to a mini-exit tax. Some trusts are subject to an exit tax. I’m sure there are a few more. But we currently have no general exit tax on individuals).<\/p>\n\n\n There are, inevitably, two opposing views:<\/p>\n\n\n\n One is that everyone is free to live where they wish, and if they move somewhere with lower tax, that’s up to them. No Government has a right to tax people for leaving. The knowledge that high-earning individuals can skip the jurisdiction, imposes a useful pressure on governments not to raise tax too high. It’s a useful form of tax competition.<\/p>\n\n\n\n The other view is that if you spend years in the UK building up your business, it’s only right that the UK should have the right to tax the gain you make on selling that business. More pragmatically, it seems counterproductive for the tax system to incentivise people to leave. This kind of “tax competition” is an undesirable infringement on countries’ right to raise taxes, particularly on the wealthy.<\/p>\n\n\n I’m not sure. I’d want to see more evidence and analysis of the real-world impact of an exit tax. A poorly designed tax could put people off coming to the UK, or even accelerate departures (i.e. by causing entrepreneurs to flee to Monaco as soon as things start going well, rather than waiting until just before their big payday). And even just talking about an exit tax is dangerous, because it could prompt tax exiles to skedaddle immediately.11<\/a><\/sup>It follows that any exit tax would have to be announced suddenly and with great fanfare, and made retrospective to the date of the announcement. This would be controversial, but introducing a non-retrospective exit tax would be *massively damaging* – there would be a mass exodus of the super-wealthy<\/span> Any exit tax would also need to be carefully designed to have no impact on people genuinely leaving the UK for other “normal” countries in which they’ll be fully taxed on their future gains – it should be targeted specifically at those who leave for tax havens (but targeting specific tax results, not specific countries).<\/p>\n\n\n\n In the interests of fairness, if we’re introducing new rules for capital gains when people leave the UK, we should also look again at the capital gain rules when you arrive in the UK. Right now if (for example), you build a business worth \u00a3100m from nothing, come to the UK and sell your business the next day, the UK will tax you on all \u00a3100m of gain. Even though little or none of that gain was made in the UK. That feels unfair; and there is anecdotal evidence that it deters some entrepreneurs from moving here. So we should have an entry adjustment – “rebasing” the asset to its market value at the date you arrive in the UK.<\/p>\n\n\n\n So there is a case to be made for changing the law in both directions, and establishing a principle that the UK taxes gains made when you were in the UK, and doesn’t tax gains made when you weren’t. But any change needs to be implemented cautiously and with great care.<\/p>\n\n\n\n<\/figure>\n\n\n\n
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Tax exiles<\/h2>\n\n\n
tax<\/s> security reasons, but given he wasn’t born here, and didn’t make his money here, he shouldn’t be on the list.<\/span> Lewis Hamilton<\/a> (racing), Tina Green<\/a>, the Barclay brothers<\/a>, Richard Branson<\/a>, David and Simon Reuben<\/a> (property), John Hargreaves<\/a> (Matalan), Terry Smith<\/a> (fund manager), Steve Morgan<\/a> (housebuilder Redrow), David Rowland<\/a> (financier), Joe Lewis<\/a> (Tavistock Group), Anthony Buckingham<\/a> (Heritage Oil), David Ross<\/a> (Carphone Warehouse, Mark Dixon<\/a> (IWG)3<\/a><\/sup>Dixon’s Wikipedia article<\/a> says he voluntarily pays tax in the UK. I doubt it.<\/span>. There are many more. Some estimate that one in seven<\/a> British billionaires now live in tax havens; others one in three<\/a>. <\/p>\n\n\n\nHow tax exile works<\/h2>\n\n\n
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Could we stop tax exiles?<\/h2>\n\n\n
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Should we stop tax exiles?<\/h2>\n\n\n
So what should we do?<\/h2>\n\n\n
\n\n\n\ntax<\/s> security reasons, but given he wasn’t born here, and didn’t make his money here, he shouldn’t be on the list.<\/div><\/li>