(Bloomberg) -- Scrapping a preferential tax regime for wealthy foreigners living in the UK could cost the Treasury around £1 billion ($1.3 billion) a year in lost revenue and drive away global elites.
That’s according to an Oxford Economics report commissioned by Foreign Investors for Britain, a private wealth lobby. It found that many “non-doms” are planning to emigrate if Prime Minister Keir Starmer’s new Labour government presses ahead with its proposed reforms.
Non-doms are British residents who are not domiciled in the UK for tax purposes. As a result, they only pay tax on money earned in the country. Defenders of the regime claim it attracts wealthy entrepreneurs who create jobs and fund philanthropy. But their preferential status came under intense scrutiny during the cost-of-living crisis when millions of Britons were struggling to make ends meet.
In March, the then-Conservative government bowed to pressure by requiring wealthy foreigners to pay tax on overseas income after living in the UK for four years instead of the current 15. At the time, budget officials estimated the move would raise around £3 billion a year.
Now Labour plans to tighten the screw by subjecting assets held overseas to British inheritance tax if a non-dom has lived in Britain for more than 10 years. Chancellor Rachel Reeves has said this together with plans to remove the discount non-doms get on foreign income brought into the UK would raise more than £2.5 billion.
However, rather than generating money, Oxford Economics said the proposals could result in a £900 million a year loss for the exchequer as a more burdensome regime prompts a greater number of non-doms to leave the UK. The country could lose a third of the non-dom population by 2029-2030, it said.
“If mishandled, these changes could severely undermine the UK’s ability to attract and retain global talent and investment – and risks the government failing to fund its key public policy spending commitments as outlined in the manifesto,” said Leslie Macleod Miller, chief executive of Foreign Investors for Britain.
Oxford Economics based its survey on 72 non-doms living in Britain and 42 specialist tax advisers representing over 900 non-dom clients.
It found that over 80% of non-doms said they’re likely to leave the UK due to the inheritance tax changes, while most of those using the remittance tax breaks said they wouldn’t have come to the country if the new restrictions had been in place at the time. Over two thirds of advisers reported new client numbers had halved since March. The new rules for both foreign income and inheritance tax are due to start in April 2025.
The number of non-doms dropped by almost half in the decade to 2022, partly the result of a 2017 change to the rules that stopped individuals using the benefit permanently. Still, those retaining the status pay almost £9 billion in British taxes a year, according to the latest official data.
In the best-case scenario, Oxford Economics estimated Britain’s non-dom population would be 7% lower in 2029-2030 than it would’ve been without policy changes. That could raise £1.3 in tax revenue in 2025-2026, with that number falling to £1.1 billion by 2029-2030.
Foreign Investors for Britain has come up with a set of policy recommendations for the government, including a Greek-style tiered-tax regime which sees non-doms paying fixed annual fees. The FIB is also calling for the government to include an inheritance tax break in this regime, for both personal assets and those held in trusts.
(Adds reference to Foreign Investors for Britain commissioning report, fiscal estimates for Labour plans)
©2024 Bloomberg L.P.
