Non-doms are paying record taxes, but Labour will shove them out the door
The wealthiest non-doms are packing their bags and taking their outsize contributions to the exchequer with them, and that’s just the start of the exodus of the wealthy that will occur if Labour implements its plans, says David Lesperance
“London is nice… but it’s not that nice!” These were the words of one of my clients when presented with his future tax obligations if the new Labour government implements its proposals on non-doms.
I’ve advised wealthy international families both in-bound and out-bound to the UK for over three decades. From this position, I am able to confirm first-hand that ultra high net worth (UHNW) non-doms are getting and executing departure plans.
Whether or not one agrees with Labour’s spending priorities, achieving those goals requires money – specifically tax revenue. Non-doms paid £8.9bn in tax in 2023, the highest level since 2017. Currently there were 37,000 non-doms in 2020-2021 who contributed an average of £170,000 each. Also as recently revealed just 100,000 taxpayers – who represent just 0.3 per cent of all UK taxpayers – pay a quarter of all income tax and CGT. Given the significant loss of tax revenue caused by the departure of any super contributing taxpayer, it is critical to properly explore the question: Will they leave?
To do this, it is worth first understanding that all UK taxpayers have a certain amount of “life inertia” in the UK. According to Newtonian principles, they will only depart if the force of additional taxation is greater than that inertia. To answer the departure question, let’s first look at non-doms, as they are the ones who will be immediately impacted by a new Labour government.
There are really two different types of non-doms. The first group are foreigners who work in the City. They pay normal tax on their UK income and opt to pay a remittance to protect the income and capital gains earned by assets they had before moving to the UK. They have a significant amount of life inertia as they have to remain in London to generate their current compensation and the loss of the remittance basis will not really increase their UK tax bill. These tend to be affluent – that is millionaires, rather than super rich – who can easily deal with inheritance tax through insurance etc. As a result, members of this group will be less likely to leave the UK.
The second group are UHNW foreigners (think Times Rich List). They do not need to remain in London to make or maintain their wealth. The previous government’s decision to abolish the remittance regime wasn’t quite enough to cause them to leave. This is because they can arrange their affairs to have minimal income. Furthermore, rather than trigger capital gains by selling assets they can borrow against them to cover living expenses. However, with Labour’s announcement regarding protected and excluded property trusts, exposure of worldwide assets to 40 per cent inheritance tax is a major shove out the door for the richest non-doms. As a result, this group is highly likely to leave the UK.
To understand the impact of their departure, it is worth noting that not only will the predicted windfall from cancellation of the remittance basis not occur, but there will be a significant drop in annual tax collections. This is a direct result of the fact that UHNW non-doms oversized contributions will no longer be there to drive that average up to its current previously noted level. A perfect illustration is Akshata Murty, who contributed £4.4m in UK tax in the year before she opted out of the remittance basis.
So the bottom-line is that UHNW non-doms are definitely looking for the exits.
What is even more ominous for UK residents is that I am now dealing with UK doms who are also exploring their departure options. They can see the writing on the wall that when Labour finds an unexpected lack of cookies in the non-dom cookie jar they will be the next target. Recent rumours about future capital gains tax increases, exit tax, increased inheritance tax and a wealth tax is just fuelling their anxiety.
Some, believing the myth that the wealthy don’t pay UK tax, will say “don’t let the door hit you on the way out”. To them, I can only cite Volaire: ”It is difficult to free fools from the chains they revere.”
David Lesperance is managing director of Lesperance & Associates. He is one of the world’s leading international tax and immigration advisors. He co-authored, with LSE Professor Emeritus Ian Angell, Flight of the Golden Geese: How the 1% Matter to the 99%