Concerns grow over wealthy foreigners leaving UK as officials review abolition of non-dom status

The UK Treasury is reconsidering key aspects of Labour’s manifesto commitment to abolish the non-domicile (“non-dom”) tax status, raising concerns that the policy may not generate the anticipated £1 billion in revenue. This reconsideration comes amid worries that wealthy individuals may emigrate to avoid the tax changes, reducing the effectiveness of the policy.

Labour’s plan to scrap the non-dom status, which allows UK residents to avoid paying tax on foreign income if their domicile is outside the UK, has been earmarked to fund key initiatives such as additional hospital and dental appointments and school breakfast programs. However, Treasury officials now acknowledge that the revenue projections from scrapping two key concessions under the plan might be overestimated or even lead to no net gain.

While the abolition of non-dom status was initially forecast to raise significant funds, approximately half of the projected revenue was already expected to be lost due to behavioural changes like emigration. The uncertainty surrounding the policy’s effectiveness has prompted Treasury officials to consider modifying or phasing in certain aspects, such as applying inheritance tax to trusts and offering discounts on foreign income repatriated next year.

Though no final decision has been made, the Treasury is determined to ensure that any policy change will raise the expected revenue. Treasury sources remain clear that despite these revisions, the non-dom tax status will still be abolished, in line with Labour’s broader agenda.

What is a Non-Dom?

A non-domiciled individual (non-dom) is a UK resident who declares their permanent home for tax purposes as being outside the UK. This status allows non-doms to avoid paying UK taxes on foreign income, unless they bring that money into the UK. Non-dom status is legal and often used by wealthy individuals to reduce tax obligations by leveraging lower-tax jurisdictions.

One high-profile non-dom is Akshata Murty, the wife of former Prime Minister Rishi Sunak, who came under public scrutiny for her tax status. Following the controversy, Murty opted to pay UK taxes on her global earnings.

Analysis

Economic Impact The revision of Labour’s plan reflects the complexities of taxing global wealth in a competitive international environment. Any significant outflow of wealthy individuals from the UK could undermine the revenue goals, especially as high-net-worth individuals play a significant role in the UK economy through investment and spending. The uncertainty over revenue forecasts highlights the challenge of creating equitable tax policies without causing unintended economic consequences.

Political Perspective The potential watering down of Labour’s flagship tax proposal might frustrate parts of the Labour base, which sees non-dom tax abolition as essential to tackling inequality. However, the Treasury’s pragmatic approach signals that the government is weighing the risks of implementing a policy that might not yield the expected returns, while still addressing public concerns over wealth inequality and tax avoidance.

Social Impact While non-dom tax status abolition is seen as a means to increase fairness in the tax system, especially following public criticism of prominent non-doms, the potential departure of wealthy residents could lead to broader economic repercussions, affecting employment and public investment.