Britain’s Reeves targets wealthy and foreign income with big tax rises

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By Andrew MacAskill and Alistair Smout

LONDON (Reuters) – British finance minister Rachel Reeves announced large tax increases on the rich on Wednesday, betting she could fund higher spending on public services without damaging the economy and triggering a mass exodus of millionaires.

For the wealthiest in Britain, the proposals will mean higher taxes on sales of their investments, businesses, estates, foreign income, use of private jets and private education for their children.

The measures include raising the rate of capital gains tax on most assets to 24% from 20% for higher earners, making it harder to pass on assets without paying inheritance tax, and ending tax discounts used by wealthy individuals who bring in foreign income.

“The choices I have made today are the right choices,” Reeves told parliament as she announced her first annual budget. “While I have sought to protect working people with measures to reduce the cost of living, I have had to take some very difficult decisions on tax.”

The scale of tax changes drew criticism from some opposition politicians who said it threatened Britain’s image as a business-friendly economy. But the decision was welcomed by Labour politicians who said it would prevent spending cuts that would hit the poorest.

The tax rises that will directly impact the wealthy the most are estimated to raise at least 35 billion pounds by the end of this decade, according to the Office for Budget Responsibility, the government’s spending watchdog.

Opinion polls show the British public supports the wealthy paying more. More than half of people support increasing taxes on the highest earners, according to research by investment firm AJ Bell published before the budget.

POLITICAL GAMBLE

But the move is politically risky because the new Labour government had spent months wooing the business elite ahead of its landslide election victory in July.

Advisers to the super-rich have said some of their clients will quit Britain if the government increases taxes because money can be easily moved across borders and investors display little allegiance to individual countries.

The government said it will increase capital gains tax on the performance fees that private equity fund managers make when assets are sold, known as “carried interest”, to 32% from 28% at the higher rate.

The capital gains tax changes also include raising rates for lower earners but keeping rates for property at the same rate as now.

Robin Salter, director at tax and accounting firm Blick Rothenberg, said the capital gains tax (CGT) rises could be counter-productive.

“The reality is that most capital gains transactions can be delayed by owners – or owners can simply move overseas – and the increase in CGT rates will just encourage such behaviour on the part of owners and entrepreneurs,” he said.

Reeves also closed several loopholes around inheritance tax. This included ending exemptions for passing on pensions in full if someone dies before the age of 75, and making it harder for people to avoid the tax by putting their money into agricultural land.

She also said investments in small companies on Britain’s Alternative Investment Market will now face a 20% rate of inheritance tax.

Further revenue-raising measures include closing some loopholes that benefit non-domiciled residents.

The government said people who are non-domiciled will have to pay tax on foreign income after four years and trusts will no longer offer permanent protection from British inheritance tax.

Currently, people who are non-domiciled can shield their foreign income from British taxes.

Reeves also announced a larger increase in air passenger duty for those travelling by larger private jets and confirmed the removal of the exemption from value added tax for private schools from January.