Labour’s miscalculation on taxing non-doms

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Trying to outdo its Conservative predecessor in efforts to tax the wealthy has proved a costly own goal for Britain’s Labour government. A wave of “non-doms” — whose permanent home for tax purposes is outside the UK — are emigrating after Labour made their worldwide assets liable for inheritance tax, with a hit to the economy and jobs. Chancellor Rachel Reeves is mulling reversing the decision; she should do so without delay. Yet even that is probably too little, too late, to repair much of the damage already done.

The 200-year-old non-dom regime that allowed residents to declare another country as their tax domicile was overgenerous and needed reforming. A Conservative chancellor, George Osborne, tightened the rules in 2017; a Tory successor, Jeremy Hunt, announced last year he would scrap the regime, from April 2025 — appropriating what had been a Labour policy. Labour came to office determined to put its stamp back on the change, and raise extra revenues where it could. It closed a loophole the Tories had purposely left open allowing non-doms to avoid inheritance tax on assets in offshore trusts.

That was a final straw for many wealthy individuals unhappy with the non-dom change and Labour tax rises such as putting value added tax on private school fees. Official figures are scant, but many financial advisers and lawyers report that between a quarter and a third of their wealthy non-dom clients are leaving Britain for more tax-friendly locations such as the United Arab Emirates, Italy or Switzerland.

Reversing the IHT change would be a further blow to the chancellor’s authority only weeks after the government had to scrap plans to strip winter fuel payments from millions of pensioners. The non-dom changes are popular with Labour’s grassroots. But the government should accept its mistake, and correct it. The bigger than expected investor exodus throws into question the £2.5bn a year average additional revenue the Office for Budget Responsibility had projected from Labour’s rule changes. The Centre for Economics and Business Research estimated last month that if a quarter of non-dom taxpayers leave the UK, the net gain to the Treasury would be zero; higher emigration would produce a net loss.

That does not take account, moreover, of the lost economic contribution from wealthy non-doms, through investment, job creation, spending and philanthropy; many cultural institutions fear funding losses. And wealthy non-Britons are leaving at the same time as UK family business owners are being hit by Labour’s surprise move to limit their relief on IHT.

Other countries, meanwhile, are stepping up efforts to woo wealth-creators. New foreign investors in Italy can pay a flat tax of €200,000 on foreign income and assets for 15 years, with no inheritance tax on foreign assets in that time. A foreign investor lobby group argues the UK should have replaced its non-dom regime with a tiered system.

It is probably too late to entice back non-doms who have left, though removing IHT might help dissuade others from following. So the government needs to find ways to attract new foreign investors and entrepreneurs and ensure the UK remains attractive — especially to Americans disaffected with the Trump administration. Many UK financial advisers say new, four-year tax incentives introduced to lure international talent need to be extended to compete with rival countries’ offerings.

There is a strong case, too, for a new UK investor visa, replacing one scrapped in 2022, for foreigners ready to invest in areas such as AI, clean energy and strategic infrastructure. Ensuring the wealthy pay a fair share of tax makes sense. But rekindling UK growth must involve wooing those who can contribute to that goal, not driving them away.