Wealth managers must incorporate a likely big exodus of wealthy people from the UK into their strategies for the next few years.

There has been no end of commentary about the horrendous – not to mince words – state of the UK public finances, as revealed in last Wednesday's Pre-Budget Report. And for those in the wealth management industry, the UK government’s decision to hit bankers’ bonuses with a 50 per cent tax, coming on top of other tax hikes on top earners, will only underscore the fact that the UK is no longer a welcoming place for high net worth individuals. The attack on bankers’ pay also raises concerns over whether the UK government even cares about respecting employment contracts and basic principles of law.

Tax planners at law firms, private banks and accountancy businesses will be rubbing their hands in anticipation of even more work. And banks may start to adjust their pay regimes to try and prevent the taxman’s assaults. As announced late last week, Goldman Sachs’ entire 30-person management committee will receive 100 per cent of their discretionary compensation in the form of shares at risk, which cannot be sold for five years, in addition to other restrictions. Of course, the US investment firm’s adjustment would have been in the works before the UK government’s latest policy move, but nonetheless, we can expect other firms to change remuneration policy to shield pay from the taxman but even such measures may not be sufficient. For some institutions and individuals, the best option is to quit the UK entirely.

So we can expect to see more banks and individuals heading for the exits. Wealth managers, figuring how best to deploy staff in the next few years, must take this into account. Headhunters are telling WealthBriefing that the exodus of talent to places such as Switzerland and Singapore is affecting the jobs market for wealth managers and where the hottest markets will be.  

At a recent Christmas party hosted by Vestra Wealth, the UK firm launched last year, several guests who are clients of the firm told me that they were emigrating from the UK, heading for places such as Switzerland. The anger is palpable. It is highly probable that such sentiment is just the tip of the iceberg. Hedge fund firms, fearing a probable crackdown on their sector by the European Union, are looking to quit the EU – and Switzerland is an obvious beneficiary. Brevan Howard, the hedge fund firm based in the UK, has recently opened a Swiss office, a move that its management say is unconnected to tax, but it is hard to believe that tax is not going to influence such moves. Earlier this year, the UK headhunter firm, Gibson-Tulberg, set up an office in Switzerland and if the exodus of talent continues, other recruiters in the UK will follow suit.

One difficulty for the wealth industry in planning ahead is knowing whether the tax rises now in the pipeline will still be in force in a year’s time. Based on current opinion polls, it looks as if the UK government will be led by the centre-right Conservative Party. But the party’s leader is not exactly Margaret Thatcher or Ronald Reagan, who both understood the importance of keeping marginal tax rates low. By contrast, David Cameron has signalled that a future Conservative administration will keep the new, top income tax band of 50 per cent on those who earn £150,000 or more a year, at least in the short run. The party has made noises about defending the City of London, but it has only been the capital's flamboyant Mayor, Boris Johnson, who has really come out fighting with angry words about the tax hikes. The Conservatives, let it not be forgotten, once embraced the supply-side doctrine, made famous by the US economist Arthur Laffer, that higher marginal tax rates reduced, rather than raised, revenues.

This doctrine may have its flaws but the basic idea is in fact just common sense: if you tax people beyond a certain level, it affects their behaviour (indeed for some taxes on things like tobacco, that is the whole point). Paradoxical though it may seem, low, relatively flat taxes actually can raise more, not less revenue than a steeply progressive system. As Chris Edwards and Daniel Mitchell of the US-based Cato Institute argued in their recent book, “Global Tax Revolution,” countries that embrace flat taxes, such as Estonia, have enjoyed rising revenue growth as incentives to create wealth have been sharpened.

But it may take time for this point to hit home among the UK’s current political elites who are playing a dangerous game. Once firms and individuals quit London for friendlier shores, they may never return. International estate agents will have plenty of work on their hands in the next few years in helping those who can make the jump to leave the UK.

As a result wealth managers must build this likely exodus into their strategies as a key driving force next year. Unfortunately, "anywhere but the UK" is going to be strong theme for the immediate future.