Labour’s plan to overhaul the non-domestic tax regime could cost the UK government up to £1 billion if wealthy individuals flee the country, a report from Oxford Economics has warned.
The proposed reforms, which will come into effect from April 2025, aim to replace the current system that allows non-domestic states to avoid tax on foreign income for up to 15 years with a new regime that would offer the benefit for only four years offers. According to the Office for Budget Responsibility (OBR), this change, part of Labour’s wider efforts to tackle perceived inequalities in the tax system, was initially expected to raise £3 billion annually. However, the OBR has recognized significant uncertainty in these estimates due to unpredictable behavioral responses from non-doms.
The Oxford Economics research shows that the non-domestic population could decline by 32% as a result of the changes, which could reduce tax revenues by £0.9 billion between 2029 and 2030. The research, 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.
RSM’s Chris Etherington expressed concern about the lack of in-depth research underlying the reforms, saying: “The Chancellor may find that her financial forecasts are built on sand if we see large numbers of non-domestic leave the United Kingdom. The proposals are arguably driven more by politics than by economics.”
The research shows that non-doms have significant investments in Britain, with respondents collectively holding £8.4 billion in the UK economy. If they were to leave, 96% of these individuals said they would reduce their investments in Britain. The report also found that changes to inheritance tax were a major problem, with 83% of non-doms citing this as a key factor in their decision to emigrate.
Under the proposed reforms, wealthy foreigners will face inheritance tax on worldwide assets after ten years of residence in Britain, and the previous exemption for foreign assets held in trust has been abolished. Oxford Economics warns that the reforms could lead to a “major migration” of non-doms, shrinking a cohort that contributes significantly to the UK economy and tax revenues.
A spokesperson for HM Treasury defended the changes, saying: “We are committed to tackling unfairness in the tax system. That is why we are scrapping the outdated tax regime outside the cathedral countries and replacing it with a new, internationally competitive, residency-based regime that focuses on attracting the best talent and investment to Britain.”