The report, and the various scenarios it sets out, illustrates how debate about the wisdom of ending the UK's resident non-domicile system will not go away.

The UK’s Centre for Economics and Business Research says that UK Chancellor of the Exchequer Rachel Reeves’ decision to remove tax exemptions for resident non-doms could cause as much as a £12.2 billion ($16.3 billion) hit to public revenues by July 2029.

The report by the CEBR adds to comments from think tanks such as the Adam Smith Institute, see here, that the end of the UK’s non-dom scheme will, when coupled with other tax bites on affluent UK citizens, lead to an outflow of revenues in net terms, rather than an inflow.

In its report, entitled Impact of changes to the UK non-domiciled regime, the CEBR estimated that if a quarter of non-domiciled remittance basis taxpayers leave the UK due to reforms to the foreign income and gains (FIG) regime, the net gain to the Treasury would be zero. 

The CEBR said other investigations into the potential behavioural responses to this policy change suggest that the emigration rate could be “far higher.” 

For instance, the report referred to a study from Oxford Economics showing that around 60 per cent of tax advisors expect more than 40 per cent of their non-domiciled clients to leave within two years of the policy change.

The decision to end the non-dom system, which dates to the late 18th century, was a bi-partisan step. The previous Conservative government, swept out of power on 4 July, had also promised to end the non-dom system and replace it, in part to undermine the Labour Party’s ability to use special tax status for wealthy foreigners as an issue. Reeves is introducing a residency-based tax code with a four-year temporary exemption for people bringing wealth into the country who have resided outside it for at least 10 years. Debate continues about how the new system will fare compared with the non-dom model, and whether a four-year relief period is too short, given competition from rival jurisdictions.

At the centre of debate is the argument that when tax rates rise beyond a certain point, they reduce rather than raise revenues. This argument plays on the idea that there is a “sweet spot” of tax levels – sometimes associated with the US economist Arthur Laffer.

Scenarios
The CEBR said that under a higher emigration rate, its modelling suggests that the Treasury would begin to make a loss. In scenarios where 33 per cent, 40 per cent, and 50 per cent of non-doms leave the UK, the net losses to the Treasury in the first year of the scheme would increase to £0.7 billion, £1.4 billion, and £2.4 billion, respectively. Over the course of the current parliament, these losses amount to £3.5 billion, £7.1 billion, and £12.2 billion, respectively, under these scenarios.

“These figures are unfortunately not surprising. Following the measures announced in the Autumn Budget we have seen a significant flight of wealth and are seeing many non-doms consider international options with increasing regularity,” Marc Acheson, global wealth specialist at Utmost Wealth Solutions, said. “Many would rather not leave, but feel they have no choice – not only because of the abolition of the remittance basis, but primarily due to the legislation that subjects assets held in trusts to inheritance tax (IHT) periodic and exit charges, and also exposes global estates to IHT for anyone who has been resident in the UK for 10 years. 

“The non-dom regime’s replacement with the new four-year Foreign Income and Gains (FIG) regime is internationally uncompetitive and too short. The UK has now lost much of its appeal to this community and, as a result, we will see more families leave in the coming years which will inevitably result in a net loss of tax receipts for the UK Exchequer unless we offer a more competitive and appealing regime for new long-term arrivals.”