UK Wealth Migration: The Canary in the Mine

In days gone by, miners often carried a canary in a cage. If the canary died, the atmosphere in the mine was probably poisonous and the miners would escape quickly. Tough on the canary but the view in those less sympathetic days was better a dead canary than a dead miner.

The Cost of Driving Wealth Away

High-net-worth migration is the canary in the coal mine for economic policy. If wealthy people are leaving a country en masse, you can be reasonably sure that the country’s economic policy isn’t working. Wealthy people are generally high taxpayers. If they leave, the country is likely to be suffering the worst of all worlds ­­­­­­ with high tax rates holding back growth but also with heavily reduced tax revenues because so many taxpayers have been driven away. Fortunately, unlike the canaries, wealthy people don’t have to die to make their point!

In the UK, the wealthiest 1% paid 28.5% of all income tax in 2023/24 according to the House of Commons Library. Before the 2024 tax changes that replaced non-domiciled status, the 83,000 non-doms paid GBP 12.5 billion in income tax and national insurance, and perhaps half as much again directly in other taxes. And of course they created jobs, incomes, and GDP, and hence further tax revenue for other people as well.

Rising Global Competition for Wealthy Migrants

Around the world, countries are falling over themselves to attract the wealthy. Switzerland has been doing so since the 1880s. Now, much of Mediterranean Europe is doing the same — Greece, Italy, and Portugal, as well as the island states of Cyprus and Malta. The Community of Madrid has introduced particularly favorable inheritance tax rules for close family members, with up to 99% deductions. Asia and other parts of the English-speaking world also have interesting offers available.

The one country that seems to be moving in the opposite direction is the UK. Recent changes in non-dom taxation, inheritance tax, property taxes, and capital gains tax have encouraged many of the wealthy to move away from the UK. Had the UK economy been performing well, migration might have been more subdued. But partly because of the tax rises, growth has been sluggish.

I have spent a lot of time analyzing for the Growth Commission the taxes that most affect behavior, including migration. It appears that capital taxes have a significant impact. Inheritance tax — which is being abolished or softened through expanded reliefs throughout the world — seem to be the biggest single driver of relocation. Other taxes that influence location decisions include taxes on overseas income, which have often already been taxed in a different jurisdiction, and capital gains tax. High rates of income tax are also relevant, but much less so than capital taxes.

Why Tax Matters More Than Ever

The impact of tax on migration is increasing. This is partly because of technology, which means that you can, to a certain extent, liberate your earning power from the tyranny of geography.

But it also reflects internationalization. Many people live in one country while maintaining links to others, and many senior businesspeople divide their time across multiple jurisdictions. For them, relocation is not necessarily the upheaval it once was. It often amounts to little more than changing the balance of days spent in one country versus another.

Wealth Mobility as a Test of Policy

Understanding the impact of policy changes on the economy is the central issue of political economy. This is especially true for tax. In the past, the UK Treasury had an institutional unwillingness to understand that some tax cuts increase revenue and some tax increases reduce it. As a co-author of a book with the celebrated Arthur Laffer, the economist whose name is synonymous with the Laffer Curve, I would scarcely be expected to agree with this view, which Rachel Reeves appears determined to test to destruction.

But one must be cautious about any assertion that lower taxes will automatically generate higher revenue. Even when they do, the benefits usually take time to materialize. Very few tax cuts produce offsetting revenues immediately. A few do so within two to three years, others within five years. But many take up to 20 years for their full effect to work through the system.

This is why the research by Henley and Partners into the factors shaping wealth mobility is so useful. Understanding the changing shape of the Laffer curve is the critical tool in the economists’ armament for analyzing policy change, especially taxes. There are a few economic luddites that simply deny the existence of the Laffer curve — it is hard to deal with people who deny reality. But it is perfectly fair to debate the shape of the curve and its movement.

The work by Henley & Partners is a critical element for understanding this. Once we can see how tax and other policy factors influence wealth mobility, we are about a third of the way towards understanding the shape of the Laffer curve and hence the impact of tax changes on the economy.