Labour Non-Dom tax reforms to cost treasury £1bn a year

In a turn of events that came as little surprise to many of us who predicted this pre-election, Labour’s plan to overhaul the non-dom tax regime could cost the UK government up to £1 billion as wealthy individuals flee the country, a report by Oxford Economics has warned.

One of Labour’s flagship manifesto policies, abolishing Non-Dom tax status was seen by the party as a way to win the populist left-wing vote, despite the obvious shortcomings of the ill-conceived policy and very shaky assumptions that underpinned the financial savings that Labour claimed would be generated.

As reported by Bloomberg News, the proposed reforms, which will take effect from April 2025, aim to replace the current system allowing non-doms to avoid tax on overseas income for up to 15 years with a new regime offering the benefit for just four years. This change was sold by Labour as being consistent with a broader effort to address perceived inequities in the tax system, and they made repeated claims that it would raise £3 billion annually for the Treasury. However, the OBR has acknowledged significant uncertainty in these estimates due to unpredictable behavioural responses from non-doms.

We argued regularly in the run-up to the General Election that Labour’s assumptions underestimated the impact that such a change would have in driving wealthy tax payers out of the UK, and ignored the reality of the world that many of them live in. The majority of Non-Dom tax payers are globally-mobile, high net worth individuals, with residences in multiple tax jurisdictions. This makes it incredibly easy for them to change their tax domicile.

As a result, any effort by the Government to increase the tax burden on these individuals would disincentivise them from retaining any sort of presence in the UK, and they would flee in their droves, taking away significant sums in investment with them.

Labour refused to acknowledge this argument, sticking resolutely (as usual) to their claims that the plans were fully costed and fully funded, and refusing to accept any shortcomings in their calculations or assumptions.

And now a survey published by Oxford Economics suggests that the non-dom population could decrease by 32% as a result of the changes, potentially reducing tax revenue by £0.9 billion by 2029-30. The study, which surveyed 73 non-doms and 42 tax advisers representing 952 non-dom clients, found that 63% of non-doms are planning or actively considering leaving the UK within the next two years.

Chris Etherington of accountancy firm RSM expressed concerns about the lack of in-depth research underpinning the reforms, stating, “The Chancellor could find her financial forecasts are built on sand if we see large numbers of non-doms leaving the UK. The proposals have arguably been driven more by politics than economics.”

The study highlighted that non-doms have significant investments in the UK, with survey respondents collectively holding £8.4 billion in the UK economy. If they leave, 96% of these individuals indicated they would reduce their investment in the UK. The report also found that changes to inheritance tax were a major concern, with 83% of non-doms citing it as a key factor in their decision to emigrate.

The Prime Minister last week held a press conference in the rose garden at Downing Street, in which he said a budget was coming “…and that it will be painful”. He added, “…Those with the broadest shoulders should bare the heavier burden”.

Well it seems the people he was talking about are not so thrilled with this idea. It was always likely that the application of socialist economic principles in the UK, which disproportionately penalise wealth creators who already carry the heaviest tax burden in society, would drive away those with high global mobility. And now this study proves that this was not simply an unfounded risk, but a very real one.

We expect this to be the first of many flagship Labour policies to crumble under real-world scrutiny. The black hole in the public finances that the Chancellor has been referring to lately just got a little bigger, thanks to their own incompetence in properly costing their manifesto pledges.

They can’t say they weren’t warned. If Labour were genuinely naïve enough to believe that those enjoying Non-Dom tax status would stay put in the UK and simply allow their tax bills to go through the roof, then that suggests an extremely concerning lack of competence on the part of our governing party. There is no shortage of choice for these individuals, with plenty of overseas tax jurisdictions who will offer them financial incentives to domicile there and to bring their investment and jobs with them.

For those countries who continue to offer tax incentives for wealthy overseas investors, our loss is their gain. This is an incredibly short-sighted policy, driven by populism over fiscal competence. As investment into the UK subsides, leading to economic pressures and job losses, there is a strong chance that Labour will have to make an embarrassing U-turn on one of their key manifesto pledges.

Expect more of the same when the economic reality of their under-costed net zero vanity projects begin to hit home also.