Non-dom tax reforms could cost labour £1bn, warns Oxford Economics

Labour’s plan to overhaul the non-dom tax regime could cost the UK government up to £1 billion as wealthy individuals flee the country, a report by Oxford Economics has warned.

The proposed reforms, which will take effect from April 2025, aim to replace the current system allowing non-doms to avoid tax on overseas income for up to 15 years with a new regime offering the benefit for just four years. This change, part of Labour’s broader effort to address perceived inequities in the tax system, was initially expected to raise £3 billion annually according to the Office for Budget Responsibility (OBR). However, the OBR has acknowledged significant uncertainty in these estimates due to unpredictable behavioural responses from non-doms.

Oxford Economics’ survey suggests that the non-dom population could decrease by 32% as a result of the changes, potentially reducing tax revenue by £0.9 billion by 2029-30. The study, which surveyed 73 non-doms and 42 tax advisers representing 952 non-dom clients, found that 63% of non-doms are planning or actively considering leaving the UK within the next two years.

Chris Etherington of RSM expressed concerns about the lack of in-depth research underpinning the reforms, stating, “The Chancellor could find her financial forecasts are built on sand if we see large numbers of non-doms leaving the UK. The proposals have arguably been driven more by politics than economics.”

The study highlighted that non-doms have significant investments in the UK, with survey respondents collectively holding £8.4 billion in the UK economy. If they leave, 96% of these individuals indicated they would reduce their investment in the UK. The report also found that changes to inheritance tax were a major concern, with 83% of non-doms citing it as a key factor in their decision to emigrate.

Under the proposed reforms, wealthy foreigners will face inheritance tax on worldwide assets after 10 years of UK residence, and the previous exemption on foreign assets held in trust has been removed. Oxford Economics warns that the reforms could prompt a “large migration” of non-doms, shrinking a cohort that significantly contributes to the UK economy and tax revenues.

An HM Treasury spokesperson defended the changes, stating, “We are committed to addressing unfairness in the tax system. That’s why we are removing the outdated non-dom tax regime and replacing it with a new, internationally competitive, residence-based regime focused on attracting the best talent and investment to the UK.”