Labour’s non-dom tax proposals a ‘tipping point’ for wealthy foreigners

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Labour’s proposals to toughen a planned crackdown by the Conservative government on tax perks for “non-doms” living in the UK would prove a “catalyst” for wealthy foreign nationals to leave the country, tax advisers have warned.

The measures are part of a wider effort to close loopholes and tighten compliance with the tax code announced by Labour on Tuesday, as the main opposition party seeks to plug a hole in funding for health and education pledges should it win the next general election.

It follows a surprise decision by chancellor Jeremy Hunt in last month’s Budget to abolish the non-dom tax regime, which allows foreigners living in Britain to assert that their domicile is overseas and thereby avoid paying UK tax on their foreign income and capital gains for up to 15 years.

But many tax experts said the further crackdown by Labour on exemptions left by the Tories would come as the final straw for many of their clients.

“If non-doms are sitting on the fence, this will be the catalyst for them to leave,” said Nimesh Shah, chief executive at Blick Rothenberg tax advisory firm.

Miles Dean, head of international tax at Andersen, another advisory firm, said his advice to non-dom clients was to “just get out while you can as it’s no longer safe as a tax environment,” adding: “We’ve got any number of clients who will not stay here waiting for the worst to happen. They will move.”

There were 68,800 non-doms in the UK, paying £8.5bn in personal taxes in 2021/22, according to the latest available data from HM Revenue & Customs.

Hunt wrongfooted Labour last month with his surprise plan to axe non-dom tax status, raising up to £3.67bn by 2027-28. This in effect borrowed one of the main opposition party’s core policies, which shadow chancellor Rachel Reeves intended to use to fund spending plans.

The latest proposals by Reeves, however, would reverse a Tory decision to permit non-doms who will lose benefits from next April to shield foreign assets held in an offshore trust from inheritance tax permanently. The party said this would generate £430mn for the exchequer annually.

Labour would also remove a one-off 50 per cent tax discount put in place by Hunt in March to non-doms who bring in foreign income in 2025-26, raising a one-off £600mn.

Sophie Dworetzsky, partner at Charles Russell Speechlys, said the changes the government had announced at the Budget “had reduced the attractiveness of the UK” but Labour’s proposals “were definitely worse”.

She added: “We are in a world where we have tax competition. We do need to be mindful that the UK’s loss will just be another jurisdiction’s gain. It’s not just losing people who are here but losing people who will not come here.”

Anthony Whatling, managing director at Alvarez & Marsal Tax, said Labour’s plans to remove inheritance tax benefits for non-UK trusts would “intensify uncertainty”.

The prospect of a 40 per cent tax on the assets would be more likely to influence non-doms’ decisions to stay in the UK, he warned, saying this “cast doubt” on the anticipated revenue boost from the changes.

But some tax experts disagreed that Labour’s proposals would trigger an exodus.

Arun Advani, an associate professor at the University of Warwick, said Labour’s plans to remove inheritance tax protections from trusts made sense because they were a simplification of the regime.

Research he has undertaken into the effects of previous changes to the non-dom rules showed little impact on those affected leaving the UK. He expected the same would happen this time.

“There will surely be some people who say that’s the tipping point for me. But most of the people are not like that. A lot of non-doms are in their 30s or 40s and working. They’re not engaged on inheritance tax issues as it’s too early for them to be focused on that,” he said.

Labour also dismissed claims that non-doms would leave the country because of its crackdown. One party official said the government had issued similar warnings last year about the impact of any changes to the non-dom regime before Hunt’s decision to scrap it.

A Treasury spokesperson said the government’s planned changes to the non-dom regime would create a “simpler and fairer residency-based system”, adding that the changes had been designed to strike the “right balance to protect the UK’s competitiveness and secure economic growth”. 

One government official said the decision to allow assets held in offshore trusts before April 2025 to be shielded from UK inheritance tax was designed to “provide certainty” for non-doms while the regime was being scrapped.

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