UK chancellor could waive inheritance tax for non-doms

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Britain’s Chancellor Rachel Reeves is considering scrapping an inheritance tax element of her non-dom crackdown despite a manifesto pledge after warnings it would cause an exodus of the wealthy and bring in little revenue.

Tax advisers have warned that the Labor government’s sweeping plans to impose inheritance tax on the global assets of UK residents who say they are domiciled or permanently domiciled abroad is the issue most likely to see them leave.

British government officials said Reeves had heard the concerns and was looking into the matter. They said that while no decisions had been made, the chancellor would not continue with non-dom policies that did not raise money.

Dropping the measure would mark a breach of Labour’s manifesto, which said: “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 tax here.”

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

The Treasury said: “We are committed to tackling inequity in the tax system so we can raise 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It added: “We are removing the outdated non-dom tax regime and replacing it with a new internationally competitive residency-based regime focused on attracting the best talent and investment to the UK.”

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

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

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

Earlier this month, a report by consultancy Oxford Economics found that 83% of non-doms identified inheritance tax on assets around the world as a key factor in their decision to emigrate.

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

“Inheritance tax reforms have been the most worrying of non-gentlemen,” said Alex Stewart, associate director at Oxford Economics.

In March, the Tories pledged to scrap non-dom status, which allows UK residents who declare their permanent residence abroad to avoid paying UK tax on their overseas income.

Labor responded with tougher proposals, saying it would end a common method of tax planning where 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 cap, rather than the Tories’ pledge to only target those created from April 2025 onwards.

Labor also proposed that individuals would be liable for UK inheritance tax after 10 years of residence and remain liable for 10 years after leaving the UK.

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

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

One European businessman hit by the changes said he would welcome complaints about the inheritance tax, which he said was the most punitive of Labour’s proposals.

“If you make money overseas and then come to the UK to find your entire global estate is taxed, people say ‘never’,” he said.

The businessman said he planned to press ahead with a plan to move his family to Switzerland regardless of any dilution of Labour’s proposals, but added that an inheritance tax cut could pave the way for him to return to the UK in the future.

Other non-dommans and their advisers said any turnaround would come too late to stop some wealthy people leaving Britain.

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

Many non-doms are worried they would be hit simultaneously by other tax changes from Labour, which came to power in the UK’s 4th July general election.

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

The chancellor has separately promised to tax carried interest – private equity managers’ share of profits from successful deals – as income, rather than capital gains, which are taxed at a lower rate.

Additional reporting by Alexandra Heal, Emma Agyemang and Emma Dunkley