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UK chancellor Rachel Reeves is ready to water down her planned Budget tax raid on non-doms amid Treasury fears that some of the measures may fail to raise any money, according to people familiar with the matter.
Reeves had hoped to raise about £1bn a year by toughening a plan by former Tory chancellor Jeremy Hunt to end the tax perk secured by wealthy foreigners who are resident in the UK and assert their permanent home, or domicile, is overseas.
But government officials said on Thursday that Reeves would overhaul the plan ahead of her October 30 Budget if the numbers did not add up, while stressing that no final decisions had been taken.
It comes amid warnings by advisers that thousands of wealthy foreigners with non-domicile status were looking to leave the UK.
“We are looking at the details of our proposals,” said one government official. “We will be pragmatic, not ideological. We won’t press on regardless, but we are not going to abandon this completely.”
Treasury officials fear parts of the government’s planned crackdown on non-doms may fail to bring in extra revenues, as current beneficiaries of the tax perk look to more favourable tax jurisdictions.
Hunt pledged to scrap the non-dom tax regime in March, with the reform due to take effect in April 2025, and intended to raise £2.7bn in revenues by 2028.
The current regime allows people resident in Britain, but who say their domicile is overseas, to only pay UK tax on their UK income and capital gains. They do not pay UK tax on their foreign income or gains, unless they bring these into the country.
Labour has pledged to scrap concessions made by Hunt in his plan to abolish non-dom status, including protection from UK inheritance tax for foreign gains and income held in trusts. The Conservatives also proposed a 50 per cent tax discount for non-doms bringing foreign income to the UK in 2025-26.
Labour has calculated its tougher crackdown on non-doms would bring in more than £1bn in tax in the first year of implementation.
Reeves is said by colleagues to remain determined to end non-dom status, and to want to go beyond Hunt’s plan, but she is still looking at the details, including on inheritance tax.
The Treasury described this as “speculation” and said the Office for Budget Responsibility, the UK fiscal watchdog, would certify the costings of all measures announced at the Budget.
It added it would remove unfairness in the tax system, and that the “outdated non-dom tax regime” would be replaced by a “new, internationally competitive, residence-based regime”.
Reeves has vowed to stick to a self-imposed fiscal rule that public debt as a percentage of GDP would be falling in five years’ time, meaning she is constrained by OBR forecasts about the effects of her tax-and-spend policies.
Hunt said: “It will be no surprise if Labour’s policy raises no money, because, as always, they fail to understand the importance of globally competitive tax rates to our economy.”
Labour’s non-dom policy was an election manifesto pledge aimed at raising money to fund more NHS hospital and dental appointments and school breakfast clubs.
The party said shortly after Hunt pledged to abolish non-dom status that it would end a common tax-planning method used by wealthy foreigners resident in Britain in which they place foreign gains and income in trusts and have the money protected from UK inheritance tax indefinitely.
The Conservatives said trusts in existence in April 2025 would not be liable for inheritance tax. Labour, by contrast, has said all existing trusts would be liable.
Labour has also proposed individuals be liable for UK inheritance tax after 10 years of residence, and remain liable for 10 years after leaving Britain.
Tax experts said any softening of these measures would be welcomed by current non-doms and potential new arrivals.
“If the inheritance tax position of the government is reined in a bit, that would go a long way to stop the exodus,” said Rachel de Souza, partner at accountancy firm RSM.
Sophie Dworetzsky, partner at law firm Charles Russell Speechlys, said the government’s inheritance tax proposals were a turn-off for non-doms.
“It’s this absolutely barking 10-year tail on inheritance tax and the fact that existing trusts — that people thought were protected from IHT — aren’t,” she said.
Additional reporting by Sam Fleming