The decision to abolish the non-dom regime could leave the Government ‘significantly poorer’, new research suggests.
Nearly two-thirds of non-doms are planning to leave the UK within the next two years, according to a study by Oxford Economics which surveyed 73 non-doms and some 40 tax advisers representing 952 non-dom clients.
[See also: More non-doms call UK home – but for how long?]
A mass exodus of UHNWs could lead to a major hole in the public purse. Non-doms paid £8.9 billion in taxes in the tax year ending 2023, up 6 per cent, or £474 million, from the previous year.
More than 80 per cent identified Labour’s stricter approach to inheritance tax (IHT) as a major reason behind a decision to relocate. This was echoed by 57 per cent of advisers, who identified IHT reforms as the main reason why clients plan to leave the country.
Just over two-thirds of respondents (67 per cent) stated they would not have emigrated to the UK had the proposed reforms been in place at the time.
[See also: Inheritance tax explained: How does it work and who is affected?]
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Non-doms currently benefit from a system that allows them to avoid paying tax on overseas income and gains for up to 15 years.
From April 2025, this will be replaced with the new foreign income and gains (FIG) regime. Although details have yet to be finalised, it is expected the new regime will only allow international UHNWs to avoid additional UK taxes on their foreign income for four years.
Labour has also confirmed that some of the Conservatives’ more forthcoming changes to the treatment of resident non-doms — including that non-doms losing the status would get a one-year reduced rate of income tax of 50 per cent — will not go ahead.
[See also: A Labour olive branch to non-doms?]
The other major cause for concern surrounds changes to IHT. A recent policy paper has indicated that Labour intends to change the way non-UK assets held in excluded property trusts are taxed.
[See also: Where are the new non-dom hubs? Advisers reveal leading destinations after Labour win]
It reads: ‘The government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT. The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here.
Non-doms will also be subject to full UK inheritance tax depending on how long they have been a UK resident. According to recent advice from private client firm BDO, ‘the test for whether overseas assets are within the scope of IHT will be whether a person has been UK resident for 10 tax years prior to the year of the chargeable event.’
Liz Palmer, Head of Private Wealth at Howard Kennedy, noted that it is difficult to calculate exactly how much these policies will cost, referring to conflicting figures published in different reports in recent months.
'The IFS report [published in March] referred to 37,000 non-doms and an increase in revenue of £1.8m if the current regime was altered,' she noted. The LSE/Warwick University report [published in September 2022] anticipated the abolition of the non-dom system would raise £3.2bn each year.
'The more ambitious the reforms, the higher the potential tax take, but an increased risk of behavioural responses causing non-doms to leave or decide not to come. I am seeing both outcomes playing out with my clients right now. Other jurisdictions are promoting their advantages and opportunities and this is giving non-doms real comparison, the immigration barriers to entry elsewhere do not seem to be material.'
She characterised her clients' behaviour as 'taking stock', explaining that the full effects of any Labour policy will only become clear once details of these proposals are confirmed.
She continued: Once the detail is available, we may find some non-doms taking a pragmatic approach influenced by their life expectancy and their connections with the UK. Non-doms who feel they can leave the UK and see out the ten-year run-off period that's currently proposed could just manage their increased inheritance tax exposure by acquiring life insurance. The younger you are, the cheaper this is.'
Alex Boothman, private client lawyer at Keystone Law, added that he had witnessed a 'significant trend' of wealthy non-dom clients who are preparing to leave the UK.
He added: ‘Many wealthy non-doms moved to the UK encouraged by a UK tax regime which promised not to tax them on wealth amassed before their move to the UK and which they did not bring to the UK. The scrapping of these policies means they feel they have no choice other than to leave the UK to protect assets which they feel the UK has no right to tax.’
