Although there is speculation that the UK government might try and mitigate the impact of ending the non-domiciled system, much damage has been done already, requiring measures to attract wealth creators back into the UK, a lawyer says.

Stories suggesting that the UK government may change course on the tax treatment of resident non-doms vindicates advisors who’ve warned that ending the system would end up costing the public purse, law firm Collyer Bristow says.

UK finance minister Rachel Reeves has said she wants to stop non-doms from being able to move their money into an offshore trust to avoid paying inheritance tax before the ban comes into place in April 2025. The Labour politician said she also plans to remove a 50 per cent discount on the amount non-doms must pay in tax in the first year of the new ban, a measure aimed at easing the impact of the change.

But while Reeves might soften the blow with the way in which she ends the non-dom system, those potentially in the firing line shouldn’t celebrate just yet, James Austen, partner at the firm, said in a note. 

“If the reports on the apparent `U-turn’ in the government’s approach to the taxation of non-doms are accurate, the Chancellor and her Treasury officials are finally taking seriously what tax lawyers have been saying for months: a punitive tax policy on wealthy internationally-mobile residents – and those who might otherwise move to the UK – will be self-defeating in its effect on the Exchequer.  Realisation may finally be dawning that we weren’t making it up,” Austen wrote. 

It seems that the government is now moving towards the tax strategy proposed by the Conservative Party in the dying months of the last government, and shorn of the additional changes proposed in Labour’s Manifesto – including scrapping the plan to change the IHT treatment of widely-used 'excluded' property trusts,” Austen continued. “We said at the time that Labour’s original proposals were fraught with technical difficulties, aside from the uncertainty about their effectiveness in generating additional tax revenue: it may be that the Treasury mandarins are privately recognising the truth of that now, too. Nevertheless, the details are presently few and vague, and affected taxpayers must remain in limbo for a while longer yet.”

Change of course?
Media stories last week, citing unnamed sources, said evidence points to how the ending of the non-dom regime will not bring any new money into the Treasury. Already, there are reports of thousands of non-doms leaving the UK or planning to do so, heading for places such as Dubai, Switzerland and Monaco, among others. 

With public finances under pressure ahead of Reeves’ autumn budget due on 30 October, the government is under pressure not to deter HNW foreigners from quitting the country. 

A change of course will not be enough to repair the damage done so far, Collyer Bristow’s Austen said. 

“Regrettably, even if a welcome U-turn on non-dom tax does come, it will be too late to prevent the damage that has already been done to the UK’s reputation as a jurisdiction of choice for wealthy international people to make their homes and businesses.”

“As tax lawyers have been saying throughout the recent political attention on non-doms, many such clients have already left the UK or are taking steps to leave before 6 April 2025: it seems unlikely that they will be persuaded to stay by a late change of heart now,” he said.

“Worse, those who might otherwise have been attracted to the UK will be wary of further changes to the government’s plans in the future: legal and tax stability are of paramount importance in attracting inward investment, whilst uncertainty (on which the UK already had a poor track record) is one of the biggest 'push' factors making a country unattractive.

“At best, the government must hope its late realisation that a punitive tax policy harms the UK economy (and reduces the government’s tax take) will prevent further immediate damage to the UK’s international reputation.  

“But to repair the reputational damage and generate additional taxation to fund the government’s domestic policy objectives, a lengthy period over which positive steps are taken to attract potential taxpayers will be necessary. Helpfully, there are good examples of effective tax and immigration policies in other G7 countries (e.g., the USA and Italy) which the UK could adapt and implement to meet its own need – provided that the government has the political will to implement such a programme,” Austen added.