Breakingviews - Britain's non-dom melodrama has uncertain finale

Reuters

6 days ago

LONDON, July 23 (Reuters Breakingviews) - Britain is haemorrhaging rich taxpayers, and it is all Rachel Reeves' fault. That's the received wisdom about the finance minister's decision to kill off so-called non-domiciled status, which allowed non-Brits to live in the United Kingdom without paying tax on their overseas income and capital gains. Yet the fiscal upshot of any expat exodus is hard to nail down.
So-called non-dom status originated in the 18th century to shield citizens working in the British Empire from taxes back at home. Its modern iteration, which allowed those born overseas to only pay tax on what they earned in the UK or brought into the country, was increasingly hard to defend. After 2008, the government made those holding non-dom status for more than seven years pay a hefty annual charge, while ministers later capped the perk at 15 years from 2017. Prior to losing an election last year, Reeves' Conservative predecessor Jeremy Hunt scrapped the category.
So when Reeves confirmed, opens new tab non-dom status was no more last October, it was hardly a surprise. Even so, her reforms had several important nuances. Recent arrivals who have been in Britain for less than four years are still able to swerve taxes on overseas earnings. Until 2028, they can also bring accumulated wealth onshore at a discounted tax rate that starts at 12% and rises to 15%, well below the typical 40%-plus charge. But former non-doms who stayed beyond April 2025 are on the hook for UK inheritance tax on their worldwide assets, also charged at 40%. This can apply for a decade, even if they subsequently move elsewhere and die there.
This last provision caused deep consternation among Britain's wealthiest expats. High-profile non-doms like Egyptian billionaire Nassef Sawiris, opens new tab are upping sticks, while an Oxford Economics survey, opens new tab last year predicted over 60% of the group would follow within two years. On paper, this looks like a fiscal own goal for the UK. A cohort of wealthy but highly mobile people who previously paid some UK tax will take their contributions elsewhere. Some have decamped to Italy, which lets new arrivals shelter overseas income for a flat fee of 200,000 euros a year.
Yet the reality is more complicated. The consequences for Britain's fiscal position depend on how much UK tax non-doms previously paid; how many quit the country; and how much overseas wealth and income they take with them. The last two figures are hidden inside a black box.
Reeves knows how much the non-doms previously contributed to the exchequer. New figures, opens new tab for the tax year ending April 2023 – the last for which there is detailed HM Revenue & Customs (HMRC) disclosure – show people claiming the status paid 7 billion pounds in tax on UK earnings and capital gains. That's how much is at risk if they all decamp.
Yet such a universal exodus is implausible. And those who stay will in future pay tax on their worldwide earnings, just like ordinary Brits. Estimating that contribution requires guesswork, because non-doms did not previously have to disclose their offshore wealth. Arun Advani of the University of Warwick hypothesises, opens new tab that the average non-dom's overseas income is similar to the figure rich Britons disclose to the taxman. If he's right, the average non-dom had offshore earnings and gains of 440,000 pounds in 2018. That figure has probably swelled due to inflation and rising asset values.
The problem is that there is no such thing as an average non-dom. Of the 42,300 people who used the status to shield offshore wealth, some 17,700 told HMRC that their overseas income and gains were less than 2,000 pounds a year, making them largely irrelevant to the exchequer. Of the remaining 24,600, some are still exempt from offshore tax because they have been in the country for less than four years. HMRC data shows that only 2,600 people paid a fee of 30,000 pounds a year or more to preserve their special status. This group may well have the largest hoard of offshore wealth. It also paid a big chunk of UK tax, accounting for 1.3 billion pounds of the 7-billion-pound domestic non-dom contribution, HMRC data shows.
The tax consequences for Reeves, then, boil down to two numbers. How much does the UK tax paid by former non-doms shrink as some of them leave? And does the additional tax on foreign earnings paid by those who remain make up the shortfall?
Answering that question involves lots of assumptions. The Centre for Economics and Business Research (CEBR), for example, estimates, opens new tab that the UK government will be worse off if more than a quarter of non-doms leave. By contrast the Office for Budget Responsibility, which monitors UK fiscal matters and has access to foreign governments' data on British taxpayers, reckons, opens new tab Reeves will on average pocket an additional 3.5 billion pounds a year between 2026 and 2030 from taxing former non-doms' overseas earnings and gains. The OBR does not disclose what happens to the domestic tax take, and stresses its figures are 'highly uncertain'. However, it assumes just 12% of non-doms will flee, implying a significant net gain for government coffers.
Measuring the scale of the exodus is further complicated by the fact that this cohort is already highly mobile. Last year, for example, 8,900 non-doms left, opens new tab Britain while 12,900 new ones arrived. It's also true that the decisions of a small number of very wealthy people could swing the results one way or another.
For Reeves, who expects the new regime and the temporary discount for bringing wealth onshore to raise 34 billion pounds by 2030, any shortfall is bad news, especially now that Labour's botched welfare reforms have left her with big fiscal holes. The Financial Times reported last month that she might limit the damage by tweaking the inheritance tax provisions, which the OBR projects will raise only 500 million pounds over the four years to 2030.
Even so, any comprehensive assessment of Reeves' decision will have to wait until January 2027, when tax returns for the year ending April 2026 are due. Before then, any accusation that she has made a major fiscal faux pas is pure guesswork.
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