Treasury rethinks Labour’s non-dom tax reforms

The UK Treasury is reportedly reconsidering elements of Labour’s manifesto plan to overhaul the "non-dom" tax status, amid concerns that the reforms could generate less revenue than anticipated. The government’s original plan aimed to raise £1 billion, primarily to fund public services such as the NHS, but Treasury officials now worry that the reforms could prompt wealthy non-domiciliaries to leave the country rather than pay higher taxes.

The "non-dom" status allows UK residents whose permanent home (domicile) is outside the UK to limit their tax liabilities on foreign earnings. While the current Labour manifesto proposes scrapping this status, earlier reforms by the Conservative government in March 2024 under then-chancellor Jeremy Hunt already sought to phase out the non-dom regime, with some concessions designed to prevent an exodus of wealthy foreign residents.

A Treasury spokesperson dismissed the current reports as speculation, stating that no specific policies have yet been submitted for certification by the Office for Budget Responsibility (OBR) ahead of next month’s Budget. However, officials admit that Labour’s plan to remove two key concessions may fail to meet their £1 billion target.

The reforms are intended to fund initiatives such as school breakfast clubs and healthcare improvements. However, according to Basil Dixon, a partner at law firm Payne Hicks Beach, the Treasury may have underestimated the impact of their reforms on wealthy residents. Dixon argues that non-domiciliaries have long been taken for granted as contributors to the UK economy and warns that many are now on the brink of leaving.

Dixon recommends that the government act swiftly to restore investor confidence, starting with the reinstatement of previous Inheritance Tax concessions. He cautioned, however, that rather than a full-scale rethink of the regime, minor adjustments are more likely to occur.

While the Treasury remains non-committal about policy changes, the ongoing debate highlights the complex balance between tax reform and maintaining the UK’s attractiveness to global investors. Wealthy non-doms, who have traditionally played a significant role in the UK economy, may reconsider their residency if the proposed reforms are not handled carefully.