Labour’s controversial non-dom tax policy has come under scrutiny after claims surfaced that it was copied from the Conservatives despite containing fundamental flaws that could harm the UK’s financial sector.
Sources say that Rachel Reeves, the shadow chancellor, dismissed warnings from Whitehall officials about the potential negative consequences yet remains determined to introduce the policy proposed by former Chancellor Jeremy Hunt.
The non-domiciled (non-dom) tax status allows wealthy individuals to live in the UK while maintaining their tax residency abroad, benefiting from significant tax breaks.
Labour has long promised to increase taxes on these wealthy individuals and redirect the funds to vital services like schools and the NHS. Part of their strategy involves closing inheritance tax loopholes tied to offshore trusts, a move that would primarily impact the ultra-rich.
Treasury Denies Inaccurate Claims
While Labour remains firm on its plans, a Treasury spokesperson has declined to comment on specific tax measures ahead of the 30 October budget but suggested that some of the recent claims regarding the policy were “inaccurate and misleading.” Reeves had projected that tightening these loopholes would bring in an additional £1 billion.
However, recent reports have indicated that the policy might have the opposite effect, potentially reducing the tax revenue as it risks altogether pushing the super-wealthy out of the UK.
Labour has continued to advocate for higher taxes on non-doms, around 74,000 individuals, to increase revenue. This tax break was brought into the spotlight in 2022 when it was revealed that Akshata Murty, the wife of then-Chancellor Rishi Sunak, used the status. The revelation sparked public outrage due to Murty’s substantial family wealth, the daughter of Indian IT billionaire NR Narayana Murthy.
The debate surrounding non-dom taxation took center stage earlier this year when Jeremy Hunt, as Chancellor, proposed cutting the current 15-year period before non-doms are taxed on their overseas income down to four years.
Hunt’s proposal, expected to raise an uncertain £3.2 billion, aimed to help fund cuts to national insurance. Labour has stuck with Hunt’s proposal, though some officials believe this decision could lead to unintended consequences.
According to Whitehall sources, officials have advised Reeves to extend the tax-free period to five years, as this could prevent an exodus of wealthy non-doms from the UK and generate more revenue.
However, Reeves has reportedly rejected this suggestion to maintain consistency with Hunt’s four-year timeline, a move seen as crucial for funding Labour’s planned national insurance cuts.
“Officials have advised her not to just adopt Hunt’s position of four years, but she said she wanted to keep to it,” said a Whitehall source.
Permanent Residency Concerns
Another issue raised by officials is the risk of making UK taxes on non-doms applicable after four years. This could inadvertently encourage non-doms to seek permanent residency, as living in the UK for five years qualifies an individual for residency status.
The Labour team has expressed concerns that such a policy might lead to fewer non-doms leaving the UK, complicating efforts to raise funds through taxation.
Labour has taken their plans a step further by targeting inheritance tax benefits enjoyed by non-doms.
In their manifesto, the party announced plans to remove protections that shield non-doms’ offshore assets from inheritance tax, even if these assets are held in trusts. Under the new policy, non-doms would become liable for death taxes 10 years after leaving the UK.
In the midst of these debates, there are concerns over the Treasury’s capacity to properly address the non-dom issue. Sources claim that a working group of senior tax officials focused on non-doms was disbanded earlier this year.
In response, a Treasury source denied that such a group had been disbanded and stated that additional staff had been assigned to work on non-dom taxation policy.
As Labour presses forward with its plan, experts worry that without a thorough review and proper adjustments, the policy could damage the UK’s attractiveness to wealthy foreign investors, potentially triggering a mass exodus of its wealthiest residents.
READ ALSO: VRA Raises Alarm Over IPPs’ Cash Waterfall Demands
