Ending UK Non-Dom Tax Breaks Boosts Fairness, Threatens Growth

Non-doms have long been a political flashpoint in the UK, with high-profile cases such as Rishi Sunak’s wife bringing the issue into the public eye. Labour made reforming the system one of its flagship policies, and despite the Conservatives borrowing the plans last year, Labour is now set to take the reins again.

The concept of domicile will be abolished starting in April, as the UK moves to a residence-based tax system. Many non-doms—people who have a non-domiciled status for UK tax purposes—will shortly see their worldwide income and gains become taxable in the UK.

It’s unclear whether the change, plus Labour’s proposed inheritance tax reforms, will deliver on its objectives—or whether the economic impact will be more disruptive than anticipated. The government seems to be focused on delivering tax fairness and short-term revenue, despite a potential risk to longer-term economic growth, and it will take time to assess whether this focus pays off.

Unintended Consequences

The reforms aim to promote fairness and raise revenue, but those objectives may end up proving mutually exclusive. While the fairness element is difficult to quantify, the new system does appear to be more equitable. Revenue is harder to predict and will probably hinge on whether the changes will make the UK more or less attractive to live and work.

New figures suggest a sharp rise in wealthy individuals leaving the UK, with reports of around 10,000 millionaires exiting last year alone—more than double 2023’s total. These individuals typically don’t just contribute taxes through their personal tax bills; they often also own businesses, employ people, spend more, invest more, and generate wider economic value.

Although the government initially estimated the changes would raise £2.7 billion ($3.5 billion) a year by 2028–29, the reality could be more complex. If the UK loses a significant share of its entrepreneurs and high-net-worth population, will the UK Treasury end up with more or less?

Beyond income tax, other changes likely will deepen the impact. Labour’s proposed reforms to inheritance tax, often perceived as unfair or as double taxation, might be a cost too far for some to remain in the UK.

Removing policies such as business property relief has sparked concern among family business owners, which contribute substantially to the UK Exchequer, that it could fundamentally affect the ongoing viability of their businesses. Entrepreneurs, such as James Dyson, have warned that the move could be a disaster for UK businesses, with Family Business UK estimating a £1.3 billion net fiscal loss.

A policy change of this size will bring tax revenue wins and losses—a balancing act the government must face.

Competing Priorities

It’s still too early to say whether these reforms will achieve their intended goals, but we do know they will create a more equitable tax environment in the UK. They will also make the tax system less subjective, allowing many people moving to the UK to benefit from tax relief for several years without the need for complex offshore banking requirements.

Employers and the internationally mobile community should welcome this development. It makes the UK a more attractive destination for global talent in the short to medium term—and drives greater spending and growth potential for the UK economy.

We know these changes will result in a higher tax burden, and thus more tax revenue, from people who stay in the UK for extended periods. But the reforms also have made the UK significantly less appealing in the long run for high-net-worth individuals, many of whom could see their non-UK income, gains, and assets falling under the scope of UK tax much sooner than before.

Although the new rules may attract people to the UK with short-term tax relief, they could discourage entrepreneurs focused on longer-term investment, which raises the question: Is the government prioritizing short-term revenue over long-term economic growth?

Outlook

Chancellor of the Exchequer Rachel Reeves has acknowledged concerns from the non-dom community and introduced adjustments to the rules. But those tweaks are unlikely to be enough to prevent an exodus, and for many, the damage may already be done.

Reversing this trend would likely require more fundamental policy shifts focusing on longer-term relief. This is particularly true for inheritance tax. Different expatriate tax framework models, such as Italy’s flat tax regime, could provide alternative ways for the government to bring in more tax revenue from long-term residents without making them face an all-or-nothing ultimatum.

However, given the government’s clear policy direction toward a fairer tax system for all, any major policy reversals would likely be politically unpalatable at this stage. Introducing further changes may also derail business and investor confidence, particularly when they are crying out for clarity and stability to make longer-term plans.

The government may need to hold its nerve and stay the course.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Conor Tobin is a tax director at Vialto Partners, advising global organizations and individuals on complex cross-border working arrangements.

Write for Us: Author Guidelines