Non-dom tax reforms could cost labour £1bn, warns Oxford Economics

Labour’s plan to reform the tax system on foreigners could cost the UK government up to £1bn as wealthy individuals flee the country, a report by Oxford Economics has warned.

The proposed reforms, which will come into effect from April 2025, aim to replace the current system that allows non-residents to avoid tax on overseas income for up to 15 years with a new system that will offer the benefit for just four years. The change, part of a wider effort by Labour to address perceived inequalities in the tax system, was initially expected to raise £3bn a year, according to the Office for Budget Responsibility. However, the OBR acknowledged that there was significant uncertainty in these estimates due to unpredictable behavioural responses from non-residents.

A study by Oxford Economics suggests the non-resident population could fall by 32% as a result of the changes, potentially cutting tax revenues by £0.9bn by 2029-30. The study, which surveyed 73 non-residents and 42 tax advisers representing 952 non-resident clients, found that 63% of non-residents are planning or actively considering leaving the UK in the next two years.

Chris Etherington of the RSM expressed concerns about the lack of in-depth research behind the reforms, saying: “The Chancellor may find her fiscal forecasts are based on nonsense if we see large numbers of non-residents leaving the UK. It could be argued that the proposals were driven more by politics than economics.”

The study highlighted that non-residents have significant investments in the UK, with respondents collectively holding £8.4 billion in the UK economy. If they were to leave, 96% of these individuals indicated they would reduce their investments in the UK. The report also found that changes to inheritance tax were a major concern, with 83% of non-residents citing it as a key factor in their decision to emigrate.

Under the proposed reforms, wealthy foreigners would face inheritance tax on their worldwide assets after 10 years of UK residence, and a previous exemption on foreign assets held in trusts would be scrapped. Oxford Economics has warned that the reforms could lead to a “massive exodus” of non-residents, shrinking a group that contributes significantly to the UK economy and its tax revenues.

A UK Treasury spokesperson defended the changes, saying: “We are committed to addressing unfairness in our tax system. That’s why we are removing the old tax system for foreigners and replacing it with a new residency-based system that is internationally competitive and focused on attracting the best talent and investment to the UK.”