Higher-rate Taxpayers Driven Away By ‘badly Designed’ Non-doms Plan

The Chancellor’s decision to remove tax exemptions for non-doms is driving businesses away from the UK and was implemented “without regard for the wider economic effects”, according to experts.

In her autumn Budget last year, Rachel Reeves announced a crackdown on the wealthy with an immediate 40 per cent inheritance tax (IHT) charge on their overseas assets.

This led to an exodus, with dozens of the UK’s richest and highest tax-paying individuals leaving the country.

Data from Companies House, compiled by Bloomberg, found that more than 4,400 directors of businesses have left the UK since last July.

Speaking to The i Paper, Rowan Morrow-McDade, tax director at Alexander & Co Chartered Accountants, said: “The changes to the non-domicile rules for IHT appear to have been implemented without regard to the wider economic effects.

“The UK, more than almost any other country in Europe, is reliant, for tax, on its highest-paid workers.”

The top 10 per cent of earners paid 60 per cent of all income tax last year and the top 1 per cent paid almost 30 per cent, Morrow-McDade said.

He added: “Many of these are non-doms, who pay an average of £120,000 of income tax, national insurance contributions, and capital gains tax each year.

“It only takes a few tax changes for them to leave and substantially reduce the UK tax take – non-dom by definition means that you have your ‘home’ outside of the UK.”

Before the changes, non-doms didn’t pay IHT on their overseas assets, but are now liable to pay the 40 per cent on all assets after living in the UK for a decade and could remain liable for 10 years after leaving.

Whilst the change in rules might raise some additional IHT, Morrow-McDade thinks it is likely that this will be “more than offset” by the decrease in income tax, national insurance contributions, and other taxes paid by non-doms such as capital gains tax, VAT and stamp duty land tax.

He said a relaxation of the rules would be welcomed, adding: “Individuals, like businesses, do not like uncertainty in terms of tax.

“It might attract some non-doms back to the UK, but many have already left prior to 6 April of this year.

“This group is highly unlikely to repack all their bags and move back to the UK again, as there is nothing to stop the rules changing a further time. It could, however, stop some non-doms leaving this tax year.”

Initially, the Office for Budget Responsibility (OBR) estimated that the move would bring in extra tax receipts of £10.3bn this year.

But research from the Centre for Economics and Business Research (CEBR) has suggested that even if no individuals who held non-dom status left the UK as a result of these changes, the Treasury would only see gains of £2.5bn in the first year.

Researchers said that if more than a quarter of the UK’s non-doms leave the country, the Treasury would begin to incur a hefty loss.

Arun Advani, director of the independent Centre for the Analysis of Taxation, said the plan was “badly designed”.

He believes a gradual approach would have stopped many of them leaving the country.

He said: “The design could be much better. The biggest issue in the design of IHT for new arrivers is the ‘cliff edge’.

“If you die nine years and 364 days after moving here, there is no tax to pay. Die after 10 years and you are exposed to the full rate, subject to any reliefs you might use.

“This huge jump in the tax overnight will surely make people sit down and think about whether they want to stay.”

A better solution, in his opinion, would be to phase in the tax. For example, if after 10 years it started at 4 per cent and then stepped up by 4 per cent each year.

He added: “More fundamentally, neither the old non-dom regime nor the new regime actually support investment in the UK – they literally provide a tax break for investment as long as it is anywhere but the UK.

“The Chancellor should absolutely be looking at extending the tax break to cover UK investments as well.”

It comes as Reform leader Nigel Farage announces his plan to restore tax breaks for non-doms in exchange for an annual fee.

If he wins power, he said he would allow non-doms to live in the UK but pay no tax on their foreign income and property if they pay a one-off £250,000 ‘entry contribution’.

The Treasury has been contacted for comment.