Reeves softens plans for crackdown on non-doms

Rachel Reeves is considering abandoning her pledge to abolish non-dom status over fears it may fail to raise any money.

Labour included a pledge to end the tax perk for wealthy residents who are domiciled overseas in its manifesto, hoping the policy would raise £1 billion a year.

However, Treasury officials are concerned that the move will force so many wealthy foreigners to leave that the measure will backfire.

Government officials said they would consider changing the details of the policy to make it less punishing to non-doms, with reducing the amount of inheritance tax they would have to pay thought to be one of the options under consideration.

The Chancellor had hoped that ending non-dom status would raise at least £2.7 billion by 2028, but is concerned that the Office for Budget Responsibility (OBR) will say her measures will lose the Treasury revenue.

The OBR previously warned that non-doms are “already highly transient”, telling the former chancellor Jeremy Hunt in March that revenues from scrapping the existing regime were “very uncertain” and could leave a black hole in the public finances in the long term.

A government official said: “There are lots of ways the policy could be worked out and the Treasury will go for the one which raises the most money.

“The priority is to make money to fund the manifesto policies.”

However, a Treasury spokesman insisted they were “committed” to “removing the outdated non-dom tax regime”.

Mr Hunt, the shadow chancellor, said: “It will be no surprise if Labour’s policy raises no money, because, as always, they fail to understand the importance of globally competitive tax rates to our economy.

“I only hope that they drop their plans which turn non-dom tax policy from something that does raise money to something that may well not.”

A “non-dom” is a UK resident whose permanent home – or their domicile – is outside of the UK for tax purposes and means they only pay tax on the money they earn in this country.

Non-doms collectively paid £8.9 billion in UK income tax, NI contributions and capital gains tax in the tax year ending 2023, the latest data available.

Earlier this year Mr Hunt announced he was scrapping the existing non-dom regime, which allows foreign-domiciled nationals living in Britain to earn money from abroad without paying UK tax on it for up to 15 years, in a move worth £2.7 billion.

From 2025, new arrivals to the UK will not pay any tax on foreign income and gains for their first four years of residency, but those who stay after this will pay tax like other UK residents.

While Labour vowed to “abolish non-dom status once and for all” by closing what it claimed were “loopholes” in the new system, experts have warned that the plans could risk a wealth exodus and deter inward investment.

Earlier this year the OBR assumed that around 1,000 non-doms could leave the country as a result of Mr Hunt’s changes.

One way in which the policy could be watered down would be changing the pledge to subject assets held overseas to British inheritance tax – charged at 40 per cent – if a non-dom has lived in Britain for more than 10 years.

They could also scrap current plans to get rid of inheritance tax protection for trusts set up by non-doms.

Another possibility would be to scrap the inheritance tax protection for trusts set up in future, but not for those already established.

They could also reintroduce Tory plans to apply a 50 per cent tax discount for non-doms bringing in foreign income in 2025-26.

While the OBR has said “personal and professional connections” are important to wealthy individuals as well as tax policy, Tim Sarson, UK head of tax policy at KPMG, said Labour’s reforms could be the “final straw” for many.

He said the most controversial part of Labour’s plans centred around its inheritance tax proposals on foreign trusts.

While many “ultra-high net worth” individuals had already left the UK, Mr Sarson added that the reforms could trigger a fresh exodus.

‘Government has to be careful’

“It’s industrialists and business owners that will probably be more frightened by inheritance tax changes,” he said.

“There’s quite a few of them. Not tens of thousands. But they are quite important to the UK economy which is something the Government has to be careful about.”

Mr Sarson also urged Ms Reeves to extend the so-called “special status” granted to non-doms by Mr Hunt that exempts them from UK tax on all foreign income and gains from four years to seven.

Another top tax partner urged the Chancellor to reduce the 10-year period for which individuals remain exposed to inheritance tax on their worldwide assets after leaving the UK.

“The bit that has offended people is this idea that their worldwide assets will be subject to inheritance tax, and that will stick for 10 years. That would affect trusts that have already been in existence for a very long time,” they said.

Ms Reeves’s departure from her flagship proposals would represent a humiliating climbdown from a Chancellor who has pledged to close non-dom tax “loopholes”.

She has already pledged to reexamine her £565 million raid on profits made by private equity managers, with some highlighting that the raid on so-called “carried interest” was not mentioned in her speech at the Labour Party conference, raising speculation of a further climbdown.

Another top tax partner warned that the two tax raids were linked. “There is a compounding impact because if you’re in private equity and you’re worried about carried interest, many of these people are typically also non-doms and often have trusts. And these people can up sticks and go,” they said.

An Oxford Economics report published earlier this month, commissioned by Foreign Investors for Britain, said that ending the preferential tax regime would cost the Treasury around £1 billion a year in lost revenues because of wealthy people emigrating or not coming to the UK.

The report suggested alternative policy options Ms Reeves could consider, including a Greek-style tiered-tax regime which sees non-doms paying fixed annual fees.

The number of non-doms had already declined by almost half to 74,000 over the decade before 2023, partly from a 2017 change to the rules that stopped individuals using the benefit permanently.

Andy Haldane, former chief economist of the Bank of England, told LBC Radio that the Treasury should be cautious about the economic risks of any reforms.

“This is a time where we need more private finance to fuel growth and recovery,” he said. “I’d be a bit careful in not deterring just the flow of finance we need to get growth going.”

An HM Treasury spokesman said: “These reports are speculation, not government policy. The independent Office for Budget Responsibility will certify the costings of all measures announced at the Budget in the usual way.

“We are committed to addressing unfairness in the tax system so we can raise the revenue to rebuild our public services. That is why we are removing the outdated non-dom tax regime and replacing it with a new internationally competitive residence-based regime focused on attracting the best talent and investment to the UK.”