In part of the rumour mill that typically grinds away ahead of a major event such as a UK budget, there is speculation that UK Chancellor of the Exchequer Rachel Reeves might hit the pause button over the end of the non-dom system, or significantly change the impact of any reform.

Amidst media reports that plans to end the UK’s resident non-domicile system will not bring in extra revenue to the Treasury, a former chief economist at the Bank of England has said there should be “cause for pause” on the government’s plans.

This week, the Guardian – a centre-left publication – published a story stating that the Labour government’s push to end the non-dom system and replace with it with a new residency system could bring in no new extra funds.

And yesterday, Andy Haldane, the former BoE economist, said it was reasonable that UK finance minister Rachel Reeves wanted to reform the system. However, ministers should think carefully if the measure would not raise any revenue and consider what it would do for business confidence. Reeves is due to deliver her budget statement on 30 October, and there is considerable speculation on whether she will hike taxes such as capital gains taxes, and squeeze inheritance tax.

Already, there have been reports and comments that thousands of non-doms have left, or are leaving, the UK, heading for offshore and onshore jurisdictions such as Dubai, Italy and Switzerland. (See a related article here.)

In the months leading up to the election, a number of commentators warned that ending the non-dom system without a sufficiently attractive replacement would drive out high net worth and ultra-HNW foreigners from the UK and shrink the tax base. Ironically, that would mean lower and middle-income voters paying more tax.

At the heart of the issue is what is called “supply-side” economics; the idea that taxes, when levied at or above a certain point, become self-defeating in revenue terms because they hit incentives to save, invest and work. In a world where capital is mobile, the perils of discouraging HNW foreigners from doing business in the UK have significantly increased.

Dating back more than 200 years, the non-dom system allows those qualifying for that status to keep their wealth and income free of UK tax provided they don’t bring it into the UK, only paying tax on UK-sourced income and wealth. (A person cannot be a non-dom permanently under reforms enacted about a decade ago.) Those seeking the remittance basis of non-dom status must also pay an annual charge. The previous Conservative government under Rishi Sunak proposed to end the non-dom system and replace it with a scheme under which those residing outside the UK for at least 10 years, and who moved to the UK, would be exempt from tax on their wealth for four years. That measure was seen as an attempt to steal Labour’s thunder on the topic. 

During this year’s general election campaign, Labour politicians claimed that they could help pay for more spending on areas such as healthcare by shutting down the non-dom system.

A report in the Guardian this week said government officials worry that the Office for Budget Responsibility (OBR) could score the non-dom clampdown as a negative – which would cost the public purse money.

“Does that make it more or less likely people would park their money, set up their businesses here and therefore generate growth? For me, that’s the meta question we’d ask ourselves and answer in the budget,” Haldane told LBC, the radio show. He said business confidence had been “heading south over the last six weeks or so,” a trend that Labour insiders see as a symptom of uncertainty before the budget in October.