Treasury reconsidering Labour plan for non-dom tax status

The UK Treasury is re-evaluating key aspects of Labour’s proposed changes to non-domicile (non-dom) tax status due to worries that the anticipated financial benefits may fall short. The reforms, initially aimed at generating funds for public services such as the NHS, might unintentionally drive wealthy foreigners out of the country.

Understanding Non-Dom Status

Non-dom status refers to individuals residing in the UK whose permanent home, or domicile, is considered to be outside the country for tax purposes. This classification allows them to pay UK tax only on income earned within the UK, potentially leading to significant tax savings if they claim a lower-tax country as their domicile.

In March 2024, former Chancellor Jeremy Hunt announced plans to phase out the non-dom regime while implementing concessions to discourage wealthy foreigners from emigrating. However, as Labour’s proposals to abolish certain concessions come under scrutiny, there are concerns that these changes might not yield the projected £1 billion in revenue for funding extra hospital and dental appointments, as well as school breakfast clubs.

Speculation and Reactions

A Treasury spokesperson has stated that current reports regarding non-dom tax changes are speculative and do not reflect official government policy. They emphasized that the independent Office for Budget Responsibility (OBR) will evaluate the costings of all proposals during the upcoming Budget announcement.

The OBR had previously flagged uncertainty regarding revenue from non-doms, noting that many opt in and out of this tax status year by year. Small fluctuations in emigration trends could significantly affect revenue projections.

Nimesh Shah, CEO of tax advisory firm Blick Rothenberg, highlighted a notable trend: some non-doms have already started leaving the UK following Hunt’s spring Budget. “Many are planning to leave over the next 12 to 18 months,” he observed, adding that logistical challenges—such as schooling and job transitions—make the decision to relocate complex.

Former Chancellor Nadhim Zahawi supported this viewpoint, claiming that British residency applications in places like Monaco soared to 5,000 in July alone.

The Challenge of Revenue Generation

Treasury officials acknowledge that Labour’s plan to abolish specific concessions may not generate the anticipated funds. Estimates suggest that roughly half of the revenue from the broader abolition initiative could be lost due to behavioral changes among non-doms, who may choose to relocate in response to the proposed tax changes.

Concerns about the overall financial impact of the non-dom reforms have prompted discussions within the Treasury about potentially modifying or phasing in the measures. This includes re-evaluating the application of inheritance tax to trusts and reassessing discounts related to foreign income in the next fiscal year.

Despite these uncertainties, the Treasury remains committed to eliminating the non-dom status altogether, stating that reforms must demonstrably raise revenue. A spokesperson reiterated the government’s goal: “We are dedicated to addressing unfairness in the tax system to rebuild our public services. That is why we are removing the outdated non-dom tax regime and replacing it with a new internationally competitive residence-based system designed to attract top talent and investment to the UK.”

Conclusion

As discussions about the non-dom tax reforms continue, the Treasury is caught in a delicate balancing act. The challenge lies in ensuring that changes to the tax system can raise necessary funds for public services without incentivizing the wealthy to leave the UK. With key decisions still pending, the outcome of these discussions will have significant implications for the UK tax landscape and its appeal to affluent individuals.