Will Labour’s non-dom reforms cost the UK £1bn?

There’s a report Labour’s non-dom changes will cost the UK £1bn – but the figure is meaningless, based on a self-selected survey.

The report shouldn’t distract from what’s an important question – what will actually happen if the Government completely abolishes the non-dom regime? And are the consequences bad enough that the Government should reconsider one of its flagship policies?

The last Conservative Budget announced the end of the non-dom regime, which exempts foreigners living in the UK from tax on their foreign income,¹That’s a considerable simplification, but sometimes only one sentence will do. I talked more about the detail here. and its replacement with a new four year exemption.²Almost certainly not as a result of my article proposing that he do just that. The Conservatives were going to allow existing non-doms to use trusts to protect their historic position – Labour will close that “loophole”.

There is a good summary here from law firm Farrer & Co of how Labour’s proposal differs from the Conservatives’.

The question is: how will non-doms react?

Anecdotally there are many reports of non-doms leaving, either prompted by Jeremy Hunt’s budget reforms to the regime, or the prospect of Labour going further. But anecdote isn’t evidence, and people who want to prevent a change in law have an obvious incentive to exaggerate the impact of that law.

This short piece looks at what evidence we do have, and whether that suggests Labour’s proposals need to be tempered.

The lobbyists’ report

The Telegraph and City AM headlines suggesting the non-dom changes will lose £1bn in tax are taken from a report from Oxford Economics. But the report isn’t freely available.

I believe that’s wrong – people trying to influence public policy should do so openly.

Here’s a full copy of the report:³© Oxford Economics and republished by us in the public interest. The report says it’s confidential. We doubt that’s correct as a legal matter, but in any case we believe there’s a legitimate public interest in publication.

PDF download here.

The £1bn estimate and other figures in the report come from a survey of 73 non-doms and 42 tax advisers. The report says nothing about how the survey was conducted and whether there was any attempt to make it representative. There is no sign of any statistical analysis.

The results are therefore statistically meaningless, in a similar way to the private school VAT survey we commented on earlier in the year.⁴The size of the private school survey was much much larger, but because of the absence of statistical controls, that doesn’t make it any better.

The survey will also have suffered from a significant “preference signal” effect – the people surveyed will have known the use to which the survey would be put, and so have an incentive to provide a dramatic answer.

I therefore don’t think anything at all can be taken from this report. All the numbers and pretty charts flow from the meaningless survey responses.

What evidence do we have of non-dom behaviour?

There were significant reforms to the non-dom rules in 2017 – most importantly, a 15 year limit on how long someone could live in the UK and remain a non-dom. So on the face of it, many people lost all the benefit of the non-dom regime, and what happened in 2017 should be an excellent guide to what will happen now.

Arun Advani, David Burgherr and Andy Summers undertook a very careful and rigorous analysis of the evidence, and concluded that very few people left as a result of these changes. I am confident they are right on this.

However we need to be cautious about extrapolating the 2017 changes to what’s now proposed, because the 2017 changes by design included a massive loophole⁵Since it was intentional it’s unclear if “loophole” is the correct word – but I’m not sure what term would work best here, so I’m lazily using the word “loophole”.: “trust protections“. Someone who was about to hit the 15 year limit could put their property into trust, and therefore keep many⁶This is a considerable simplification but is in essence correct, subject to careful tax planning and implementation. of the benefits of being a non-dom including, importantly, that their non-UK assets remained outside inheritance tax.

Most non-doms don’t have significant assets outside the UK, and didn’t take advantage of the trust protections.⁷Take, for example, a professional who has come to work in the UK from abroad, perhaps a doctor perhaps a banker. They may be highly earning, but they have little in the way of assets and are relatively young. They would be paying income tax and capital gains tax at similar rates in most countries where they could be working. They are therefore not terribly bothered about inheritance tax (which they could insure against anyway). If they are working here and have a young family, it is often not very easy or desirable for them to move abroad. So it’s unsurprising we didn’t see many such people leaving in 2017. Now it has been suggested that the Tory/Labour change may cause some such people to not come to the UK in the numbers they have historically, because four years is too short a timeline. I am a little sceptical of this; I don’t think four year tax horizons are something most normal people think about when moving from one country to another. It was a small number of the very wealthiest – “ultra high net worths” (UHNWs) – who did, and they therefore weren’t much affected by the 2017 changes.⁸An extreme example would be an Arab sheik, who has property all over the world, but spends four months a year in the UK. He pays very little tax here, but spends a lot of money here. He simply won’t accept paying UK income tax or capital gains tax, and certainly not 40% inheritance tax. It would be very easy for him to cease being UK resident, because that would just have involved spending a bit less time in the UK. However it was also very easy for his advisers to set up an appropriate trust.⁹Another example would be a senior private equity executive, probably American. He or she won’t care very much about capital gains tax or income tax, at their current rates, because they’re fully subject to US tax and the rates aren’t much different. But UK inheritance tax will have been seen as a big problem – in practice it’s much much higher than US estate tax. Again, it would have been fairly straightforward for them to use trust protection.

The Conservatives would have preserved that “trust protection” for assets put into trust before April 2025. Labour is committed to end it. That means all non-doms will (after a few years) be fully subject to income tax, capital gains tax and inheritance tax.

Labour’s changes therefore will impact UHNWs much more than the 2017 changes (which in economic terms barely affected most of them). I’ve spoken to many UHNWs and their advisers, and the prospect of their estate being subject to inheritance tax is seen as highly significant. Hard evidence is hard to find, and we’re left with little more than anecdote. That’s tricky when the number of people affected is very small, and the sums are very large.

So whilst I believe the research from Advani et al tells us how the vast majority of non-doms will react to Labour’s changes, I don’t believe it tells us how the UHNWs will react.

Do we care if the UHNWs leave?

There are two effects if the non-doms leave the UK, or spend less time here

(The “spend less time” is important. You will, generally speaking, be resident in the UK if you spend three months here. There are some non-doms who spend four months a year in the UK. For them, leaving the UK could involve just spending five weeks fewer here.)

The obvious effect is that they will pay less tax. Non-doms pay a large amount of tax, and “deemed doms” (who’ve been here past the 15 year time limit) also pay a considerable amount. However (whilst no data is available) my strong expectation is that most of this tax is paid by the “normal” non-UHNW non-doms, who are unlikely to leave.¹⁰Why? Because “normal” non-doms – doctors, bankers, etc – earn employment income here and pay tax on it. UHNWs don’t work here, and their income will mostly, or even entirely, be foreign investment income which isn’t taxed under current rules unless remitted to the UK.

The more important, and more subtle, impact of UHNWs leaving will be economic. What happens if some of the wealthiest people in the world leave the UK, either completely or for at least 9 months each year?

I’ve spoken to a variety of economists on this and heard a wide range of views – for example:

• One view is that there will be significant adverse effects. UHNWs will spend less money here, both on business investments and personal purchases. Businesses run by UHNWs (such as private equity) will leave. Property prices will be affected. There will be job losses across the entire ecosystem that has grown up around UHNWs – accountants, lawyers, restaurants, interior designers, car showrooms. The City of London, which is responsible for an outsize share of the UK’s economic output and tax revenues, will decline.
• An alternative view is that the UK economy doesn’t actually benefit from UHNWs. They have caused significant asset price inflation, and of house prices in particular. The employment they generate is not particularly productive or socially useful, and their exit would prompt employment to move into more productive sectors (given that the economy is at or near full capacity). A relative decline in the City would be a good thing.

I’m not an economist and so I’m unable to judge which of these scenarios is closer to the truth. However answering the question of what happens if UHNWs leave seems to me critical to any non-dom tax reforms.

So what should Labour do?

I see four ways Labour can resolve the UHNW/non-dom issue:

• Conclude that most UNHW’s won’t leave if Labour proceeds with its reforms (I am sceptical).
• Accept that most UHNWs will leave, but conclude that the economic cost of this is negligible, or even that there’s a benefit.
• Accept that most UHNWs will leave, and there will be an economic cost, but proceed anyway for principled and/or political reasons.
• Conclude that most UHNWs will leave, and that’s undesirable – and so do the minimum necessary to stop them leaving in significant numbers. That probably means preserving¹¹Or perhaps tapering down over decades. their inheritance tax exemption.¹²And it could be made a simple IHT exemption for foreign property, rather than requiring trust shenanigans.

An important point to add: making the UK more attractive for non-doms is not just a question of tax. I’ve heard a variety of non-tax concerns which have driven some UHNWs to consider leaving the UK (or indeed pushed them to already leave). The most common: crime, difficulties navigating the immigration system, and fears about the long term economic future of the UK.

Anyone wishing to lobby for retaining the status quo, or at least elements of it, would be much better off addressing these very real tax and non-tax questions, rather than producing glossy reports based on bogus statistics.

The private schools’ attempt to lobby against Labour’s VAT proposal was a dismal failure because it chased headlines in Conservative newspapers rather than assembling evidence that could convince Labour policymakers, and making proposals for incremental changes.¹³For example, arguing that Labour should phase in the change. Those who wish to defend the non-dom regime should avoid falling into the same trap.

Many thanks to all the non-doms and advisers who’ve spoken to me in the last few months.

• 1
  That’s a considerable simplification, but sometimes only one sentence will do. I talked more about the detail here.
• 2
  Almost certainly not as a result of my article proposing that he do just that.
• 3
  © Oxford Economics and republished by us in the public interest. The report says it’s confidential. We doubt that’s correct as a legal matter, but in any case we believe there’s a legitimate public interest in publication.
• 4
  The size of the private school survey was much much larger, but because of the absence of statistical controls, that doesn’t make it any better.
• 5
  Since it was intentional it’s unclear if “loophole” is the correct word – but I’m not sure what term would work best here, so I’m lazily using the word “loophole”.
• 6
  This is a considerable simplification but is in essence correct, subject to careful tax planning and implementation.
• 7
  Take, for example, a professional who has come to work in the UK from abroad, perhaps a doctor perhaps a banker. They may be highly earning, but they have little in the way of assets and are relatively young. They would be paying income tax and capital gains tax at similar rates in most countries where they could be working. They are therefore not terribly bothered about inheritance tax (which they could insure against anyway). If they are working here and have a young family, it is often not very easy or desirable for them to move abroad. So it’s unsurprising we didn’t see many such people leaving in 2017. Now it has been suggested that the Tory/Labour change may cause some such people to not come to the UK in the numbers they have historically, because four years is too short a timeline. I am a little sceptical of this; I don’t think four year tax horizons are something most normal people think about when moving from one country to another.
• 8
  An extreme example would be an Arab sheik, who has property all over the world, but spends four months a year in the UK. He pays very little tax here, but spends a lot of money here. He simply won’t accept paying UK income tax or capital gains tax, and certainly not 40% inheritance tax. It would be very easy for him to cease being UK resident, because that would just have involved spending a bit less time in the UK. However it was also very easy for his advisers to set up an appropriate trust.
• 9
  Another example would be a senior private equity executive, probably American. He or she won’t care very much about capital gains tax or income tax, at their current rates, because they’re fully subject to US tax and the rates aren’t much different. But UK inheritance tax will have been seen as a big problem – in practice it’s much much higher than US estate tax. Again, it would have been fairly straightforward for them to use trust protection.
• 10
  Why? Because “normal” non-doms – doctors, bankers, etc – earn employment income here and pay tax on it. UHNWs don’t work here, and their income will mostly, or even entirely, be foreign investment income which isn’t taxed under current rules unless remitted to the UK.
• 11
  Or perhaps tapering down over decades.
• 12
  And it could be made a simple IHT exemption for foreign property, rather than requiring trust shenanigans.
• 13
  For example, arguing that Labour should phase in the change.