UK 'non-doms' could leave over inheritance tax proposals, lawyers say

Labour has pledged to close tax loophole for wealthy foreign residents if elected

Wealthy people are likely to leave the UK if Labour puts its plans to close tax loopholes into action, lawyers say. PA

Wealthy people are likely to leave Britain if Labour's proposals to close non-dom tax loopholes are enacted, lawyers say.

Earlier this week, the party's shadow chancellor, Rachel Reeves, announced plans to raise £2.6 billion over the next five years by closing exemptions for “non-doms”. These are people whose whose permanent home - or domicile - for tax purposes is outside the UK.

Industry lawyers say the reforms, which will subject more foreign-held assets to inheritance tax, could backfire and lead to an exodus of wealthy foreign residents.

Anthony Whatling, managing director at Alvarez & Marsal Tax, described Labour's plans as "worrying".

"This reform could intensify uncertainty, with the prospect of a 40 per cent tax on certain assets more likely to influence non-doms' decisions to stay in the UK, and casting doubt on the anticipated revenue boost from these changes," he said.

Andrew Goldstone, a tax partner at Mishcon de Reya, said Labour's plans were a "genuine concern" for wealthy non-doms who were likely to leave the UK, "taking with them their spending, investment, businesses and employment".

"This is particularly likely where they are older, unmarried or facing health issues, and where inheritance tax at 40 per cent on their global assets is a genuine concern," he added.

During the annual budget, Chancellor Jeremy Hunt announced that his government would scrap non-dom status and replace it with a “modern, simpler and fairer residency-based system”.

Ministers are also consulting on changes to inheritance tax for wealthy foreign UK residents, but the UK Treasury has said non-UK assets placed into an overseas trust by April 2025 will not be in the scope of inheritance tax.

Ms Reeves said her party would go further than the Conservatives in its tax clampdown, with the new funds going towards increasing NHS appointments and primary school breakfast clubs.

Labour also vowed to scrap a 50 per cent discount in the first year of the new rules, raising £600 million, and said foreign assets held in trusts would be subject to UK inheritance tax, potentially raising another £430 million a year.

The party also said it would invest up to £555 million a year to increase the number of compliance officers at the HMRC tax office.

“It is wrong that a minority continue to avoid paying what they owe,” Ms Reeves said in Labour’s statement. “The plan we are announcing today will give HMRC the resources it needs to go after those who are avoiding or evading tax.”

Non-dom status and inheritance tax

Under the UK's current regime, non-domiciled residents, from middle-ranking bankers to multi-billionaires, don’t pay UK taxes on their overseas earnings.

More than one in five bankers earning more than £125,000 ($160,000) previously claimed non-dom status, according to 2022 research by the London School of Economics and the University of Warwick.

At the moment, no inheritance tax is due on non-UK assets of non-doms until they have been UK resident for 15 out of the past 20 tax years.

The government says it is consulting on the best way to move inheritance tax to a residence-based regime.

"Decisions have not yet been taken on the detailed operation of the new system, and we intend to consult on this in due course," the Treasury has said.