Reeves’ non-dom crackdown is unwittingly driving rich Brits away too
The hordes of wealthy foreigners leaving Britain to escape the government’s non-dom crackdown are being joined by high-net-worth Brits capitalising on an arcane element of the policy that has made it easier for them to avoid paying inheritance tax (IHT).
Several wealth advisers and tax lawyers have reported a “second wave of interest” from middle-aged rich UK nationals looking to relocate in the knowledge that under new tax rules introduced in the overhaul, their estate would no longer be liable to UK IHT.
As part of her contentious non-dom changes at last year’s Budget, Rachel Reeves opted to change the tax system from one that focused on where people were domiciled – an esoteric concept meaning the country someone treats as their permanent home – to one focused on residence.
Doing so allowed her to abolish the centuries-old ‘non-dom’ status in favour of a less generous system – known as the Foreign Income and Gains regime – that deems wealthy immigrants resident after just four years.
The move – which was accompanied by a sharp tightening of how the Exchequer treats non-doms’ foreign-held trusts – is said to have sparked an exodus of rich foreigners who claimed the status.s
It has emerged that several high-profile non-doms – including Aston Villa co-owner Nassef Sawiris and Goldman Sachs’ Richard Gnodde – left in the aftermath of the changes, leading to warnings from advisers and economists that the change has backfired and might cost the Treasury money.
Non-dom changes driving ‘large increase’ in enquiries from Brits
But wealth experts are now sounding the alarm that the decision to shift to a residence-based scheme is inadvertently incentivising their wealthy British clients to leave the UK too, triggering fears that the hit to the public finances may be greater than first feared.
James Quarmby, founding partner of Stephenson Harwood’s private wealth team, told Morning Wire that he had seen a “large increase in British clients” seeking relocation advice since April because the new rules mean they can escape liability to UK IHT after spending just 10 years abroad.
“The rules are driving away non-doms and probably stop many more coming over,” he said. “But it will also encourage wealthy Brits to expatriate.”
Quarmby highlighted that many of the jurisdictions seeking to attract wealthy retirees generally have no or low inheritance taxes, adding: “What could be better – retiring abroad in the sun, lower tax on your pension – Greece has seven per cent, Cyprus has five per cent – and after 10 years no UK IHT? It’s an amazing deal.”
Under the former domicile-based regime, it was famously hard for UK nationals who had emigrated to know whether they were liable to IHT on their worldwide assets, unless they severed absolutely all ties to the UK. That opaqueness acted as an inadvertent handbrake on UHNW expatriation, advisers said, until clarity came in the Autumn Budget.
“Certainty provides opportunity here and we are seeing more and more people wanting to mitigate IHT,” said Marc Acheson, global wealth specialist at Utmost Wealth Solutions. “For some, the new rules will incentivise them – alongside many other drivers, as few people leave purely for tax – to perhaps leave earlier, with that 10-year clock now in clear focus.”
Rich Brit departures make fiscal picture bleaker
The warnings will heap further scrutiny on the prudence of the Chancellor’s long-promised non-dom crackdown, after a slew of warnings that it would not raise as much money as the government had promised.
The Office for Budget Responsibility – the UK’s fiscal watchdog – estimated the policy would raise £34bn over the next parliament in its analysis after April’s Spring Statement.
But a recent study from the economic consultancy Chamberlain Walker found that just a quarter of the UK’s non-doms and former non-doms emigrating would blow a £34bn black hole in the public finances.
Meanwhile the Centre for Economics and Business Research (CEBR) has suggested if half of the country’s footloose wealthy foreigners leave by 2030, government revenues would fall by £12.2bn.
“This underlines what a silly policy the abolition of domicile for tax purposes has been. It’s driven away the non-doms and is encouraging UK doms to leave as well,” Quarmby said. “It’s a lose-lose scenario.”
Morning Wire understands the Treasury is exploring technical tweaks to the policy that might stem the flow of departures. But any change is unlikely to involve switching back to domicile-based taxation, and so would not affect the policy’s impact on UK national emigration.
Acheson said that the government’s parallel inheritance tax crackdown – announced in the same set of measures as the non-dom reforms – would only add to the number of Brits considering leaving.
Chancellor Rachel Reeves chose to remove two decades-old carve-outs to the unpopular levy during her maiden Budget, which had exempted farmland and family businesses from the tax. She also brought pensions into the orbit of IHT.
Acheson said: “Tax is increasingly the driver [of UHNWIs’ decisions to relocate] rather than just a lifestyle decision – though jurisdictions of choice such as Italy (Milan) and Switzerland score very highly in terms of lifestyle too.
“IHT is a particularly unpopular tax applicable at what many perceive as modest levels of wealth.”
He added: “Certainty of tax treatment and cliff-edge timeframes to lose IHT exposure mean people can plan – and they will.”
A spokesman for the Treasury said: “The UK remains highly attractive. Our main capital gains tax rate is lower than any other G7 European country and our new residence-based regime is simpler and more attractive than the previous one, whilst it also addresses tax system unfairness so every long-term resident pays their taxes here.”