UK chancellor may drop inheritance tax hit to non-doms

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

UK chancellor Rachel Reeves is considering dropping a contentious inheritance tax element of her non-dom crackdown despite a manifesto commitment after warnings it would cause an exodus of wealthy people and bring in little revenue.

Tax advisers have warned the Labour government’s sweeping plans to impose inheritance tax on the global assets of UK residents who say their permanent home or domicile is overseas is the issue most likely to cause them to leave.

UK government officials said Reeves had heard the concerns and was looking at the issue. They said that while no decisions had been made, the chancellor would not press ahead with non-dom policies that did not raise any money.

Dropping the measure would mark a breach of Labour’s manifesto, which stated: “We will end the use of offshore trusts to avoid inheritance tax, so that everyone who makes their home here in the UK pays their taxes here.”

One government official said the chancellor would be “pragmatic not ideological”.

The Treasury said: “We are committed to addressing unfairness in the tax system so we can raise the revenue to rebuild our public services.”

It added: “We are removing the outdated non-dom tax regime and replacing it with a new internationally competitive residence-based regime focused on attracting the best talent and investment to the UK.”

One government figure said the independent Office for Budget Responsibility had also been told by non-dom advisers that new inheritance rules could cause people to emigrate.

The OBR said in March that the impact on the public finances from changing the non-dom system was “highly uncertain”.

Reeves hoped to raise £2.6bn over the parliament from her crackdown on non-doms, including £1bn in its first year in operation.

Earlier this month a report from consultancy Oxford Economics found that 83 per cent of non-doms identified inheritance tax on worldwide assets as a key driver of their decision over whether to emigrate.

The report was on behalf of lobby group Foreign Investors for Britain.

“It was the inheritance tax reforms that had non-doms most worried,” said Alex Stewart, associate director at Oxford Economics.

In March, the Conservatives pledged to abolish non-dom status, which allows UK residents who declare their permanent home as being overseas to avoid paying UK tax on foreign income.

Labour responded with more stringent proposals, saying it would end a common tax planning method in which trusts are used to shelter foreign assets and gains from UK inheritance tax indefinitely.

The party planned to go further by including existing trusts in the inheritance tax clampdown rather than the Conservatives’ pledge to only target those created from April 2025 onwards.

Labour has also proposed that individuals should be liable for UK inheritance tax after 10 years of residence, and remain liable for 10 years after leaving Britain.

People close to Reeves insist she will move beyond the Tory plan and press ahead with some elements of her non-dom crackdown, but only those that would make money.

The debate within the Treasury over the policy comes as other locations like Italy, Switzerland and the Middle East are trying to lure wealthy foreigners with tax breaks.

One European businessman affected by the changes said he would welcome a row back on inheritance tax, which he said was the most punitive of Labour’s proposals.

“If you make money abroad and then come to the UK to find that your entire global estate is taxed, people say ‘no way’,” he said.

The businessman said he planned to go ahead with a plan to move his family to Switzerland regardless of any watering down of Labour’s proposals but added that a softening on inheritance tax could pave the way for him to return to the UK in future.

Other non-doms and their advisers said any U-turn would come too late to stop some wealthy people leaving the UK.

One French investor in his forties who is moving to Milan early next year said: “When people lose confidence, they’re gone.”

Many non-doms are concerned they would simultaneously be hit by other tax changes under Labour, which swept to power at the July 4 UK general election.

Investors are concerned that Reeves could raise capital gains tax, a move she has not ruled out.

The chancellor has separately promised to tax carried interest — private equity managers’ share of profits on successful deals — as income rather capital gain, which is taxed at a lower rate.

Additional reporting by Alexandra Heal, Emma Agyemang and Emma Dunkley