A lively article in this journal asks the question 'Is now a sensible time to introduce a wealth tax in the UK?' (D Hanna, Tax Journal, 7 June 2023). Its subtitle contains the answer 'Not if Norway is any guide.' The search for international examples is a natural one, but it is also fraught with danger unless we try to understand the overall policy context.
Unlike the UK, Norway has long had a wealth tax. In 2021, the wealth tax was 0.85% above net wealth of NOK 1.5m (roughly £125,000). The current government raised the top rates, to 1.1% on wealth above NOK 20m (roughly £1.6m). That 1.1% is precisely the same rate as it was in 2013, though actual tax paid may have fallen, since there is now a 20% discount in the valuation of stock wealth.
Despite this, recent claims – regularly repeated in the popular press (including The Guardian and The Telegraph) – are that the relatively modest tweak back to 1.1% has led to a 'flight of the billionaires'. This seems somewhat surprising given the relatively marginal change in the wealth tax and these billionaires’ previous experience of paying it. Even more so since the billionaires are not leaving Norway to come to the UK but rather moving to Switzerland which has a very effective wealth tax of its own. An emigrating Norwegian is unlikely to opt for the lump sum system of taxation or forfait as otherwise the deferred exit tax explained below could not be avoided. Therefore they will be liable to Swiss wealth tax.
The reason for the flight is, we suggest, little to do with wealth tax but rather the changes to CGT. Since 2006 Norway has had a CGT, which – as in the UK – applies to gains on realisation; by contrast, Switzerland has no CGT. Like the UK the tax is largely residency based: in the case of Norway, under the old rules as they existed before 29 November 2022, there was a ‘deferred’ exit tax but this expired five years after departure unless the shares had been sold in the interim. This meant that leaving Norway for five years provided a relatively easy way of avoiding CGT.
Since November 2022, however, the exit tax obligation remains indefinite, and the shareholder must pay an increased rate of CGT – currently 37.84% – upon the sale of shares. The deferred tax upon emigration on or after 29 November 2022 will not lapse after five years but only upon death, although it is not yet clear what happens if the migrant dies abroad. Transfers to family members other than spouses who are resident abroad will also trigger the exit tax (as unlike the UK, we understand that such gifts would normally take place on a no gain no loss basis). Indeed now it is proposed that the deferral of the exit tax on sale may be abolished altogether so that it could become immediately due and payable upon departure or payable in instalments.
By leaving before 29 November last year, wealthy Norwegians were able to avoid paying CGT on accrued gains. We suggest that it is this much bigger change, not the marginal tweaks to the Wealth Tax, that they were responding to.
So what are the lessons for the UK? First, that the exit tax was seen to be effective enough that people needed to leave before it came in if they were to avoid the tax. The UK may need to consider this Canada-style model, including 'rebasing on arrival' – excluding pre-immigration gains from CGT – particularly since a new approach to the connecting factors for CGT will be needed, if the non-dom remittance regime is abolished although there are other alternatives.
Second, pre-announcement of certain reforms can be costly when there are delays in implementation. Ideally the implementation date should be the same as the original date of announcement. The emigration of wealthy Norwegians happened precisely because there was a gap between announcement of the new rules and those rules coming in to force.
Third, better taxation of wealth is all about the details and design of the legislation and its implementation. If we want to fix the well-documented problems in the taxation of wealth, it is critical to think through all aspects and consider interaction with other taxes. We did not recommend a Norwegian-style low-threshold annual wealth tax for the UK (see Wealth Tax Commission final report in December 2020). However, we think it is helpful and important for readers and legislators to understand the reasons behind people’s behaviour when considering and framing policy.
Dr Arun Advani, Emma Chamberlain & Dr Andy Summers, The Wealth Tax Commission
