Will UK chancellor’s non-dom tax U-turn do enough to prevent rich flight?

The softening of tax rules for non-doms announced by UK Chancellor Rachel Reeves at Davos has been hailed as a U-turn after thousands decided to quit the UK, but for others the move does not go far enough to make staying worthwhile.

People who are non-domiciled in Britain for tax purposes live in the country, but do not pay tax on income from activities carried out outside the UK. The government will scrap the non-dom status in April and replace it with a residence-based regime, which brings wealth held abroad into the UK inheritance tax system.

The move, announced by Ms Reeves in her budget speech last October, increased the flow of high net worth individuals leaving the UK. A report by global analytics firm New World Wealth and investment migration advisers Henley and Partners found more than 10,000 millionaires left the UK last year, an increase of 157 per cent on 2023. In addition, analysis by the Adam Smith Institute showed that, had the millionaires stayed, they would have paid an average of £393,957 in income tax, meaning their departure is equivalent to the loss of half a million average taxpayers.

But on Wednesday, Ms Reeves told a World Economic Forum session in Davos that she had been "listening to the concerns that have been raised by the non-dom community".

"And in the finance bill, we will be tabling an amendment which makes more generous the temporary repatriation facility, which enables non-doms to bring money into the UK without paying significant taxes," she added.

Double tax

Ms Reeves also sought to allay fears that the changes to the non-dom tax regime would have a bearing on the double-taxation treaties the UK has with various countries, including the UAE. "That's not the case," she said. "We're not going to be changing those double taxation conventions." Double taxation treaties ensure that individuals and companies are not unfairly taxed twice on earnings. The UK signed a double taxation treaty with the UAE in 2016.

The temporary repatriation facility (TRF) is aimed at luring current non-doms to bring money the UK. It is available for just three tax years, from the tax year starting in April. The facility's tax rate will be 12 per cent for the first two years and 15 per cent in the final tax year of operation. It is thought that Ms Reeves might announce some lowering of these rates in the Finance Bill, but the government said the move does not "change the overall approach" to the policy.

But Andrew Marr, managing partner at Forbes Dawson, thinks Ms Reeves may be considering another strategy. "I have a sneaking suspicion that she got her policies a bit mixed up and may actually be intending to extend the three-year tail for a period past 2025/2026," he told The National. "This will allow [the non-doms] to wait and see how things go rather than being rushed to the exit door. If her comments are to make any tangible difference, then she needs to get cracking and produce some unambiguous new policy that people can consider."

'Damage is already done'

As such, many tax advisers have been unmoved by Ms Reeves's comments in Davos. "Whilst the TRF was a very welcome rule, it does not impact the tax position in respect of future income/gains or inheritance tax," Alexandra​​​​ Britton‑Davis​, partner​ at the tax experts Saffery, told The National. "I therefore don’t expect this to change the plans of anyone who has left/plans to leave."

Helen Clarke, a partner at Irwin Mitchell, said that while it was "good to see that the government is listening to the concerns of the non-dom community", Ms Reeves's tweak is "not enough".

"The primary reason for the exodus of wealthy individuals is the 10-year tail and the inheritance tax implications for non-dom taxpayers. While the increased temporary repatriation facility is a step in the right direction, more comprehensive measures are needed to address the root causes of this issue,” she added.

Robert Brodrick, chairman of the private client business at Payne Hicks Beach, said he will not be changing the advice to his clients in the light of Ms Reeves's comments. "The UK is no longer the attractive place for internationally wealthy individuals that it once was. And post-Brexit, and in the absence of an investor visa, it is increasingly difficult for wealthy international individuals to move to the UK," he told The National.

The UK Treasury said the changes to the non-dom tax regime will raise £33.8 billion of tax revenue, but shadow chancellor Mel Stride said the softening of the non-dom tax changes proved Ms Reeves's budget was "falling apart in front of our eyes" and that the Chancellor is "deeply out of her depth".

"At the election Labour said their plans would raise money. Now they have been forced to admit their plans make the UK less attractive," he added. "But the damage is already done. Tax revenue equivalent to hundreds of thousands of taxpayers has already been lost."