With growth flatlining at best, and demands for public spending continuing to mount, the UK Chancellor is under pressure to reverse a policy that arguably has contracted the tax base, not increased it.

Wealth advisors said that if the UK government decides to reverse its decision to charge UK inheritance tax (IHT) on global assets of resident non-doms, it will add further damage to its reputation for competence, even though the move might be welcome.

Reports said that Chancellor of the Exchequer Rachel Reeves, who last October confirmed plans to abolish the resident non-dom system, is thinking of a U-turn over her idea of charging IHT to non-doms on their global assets. The IHT step was seen as encouraging many wealthy people to leave. Reeves has enacted a new residential system, or "foreign income and gains" regime.

Since last October, there have been stories about how thousands of non-doms and other HNW and ultra-HNW individuals have left the country, or are considering leaving, heading to the likes of Italy, Portugal, Dubai, among other places. Think tanks such as the Adam Smith Institute and the Centre For Economic and Business Research (CEBR) (see here and here, respectively) say that, depending on how sharply the changes bite, it will shrink tax revenues, rather than increase them.

At a time of weakening UK economic growth and expected spending pressures on health, defence and social care, Reeves is under pressure to reconsider policy. At the core of the issue is what is called “supply-side” economics – the idea that at a certain level, tax hikes don’t raise more revenue, but less. The topic is not peculiar to the UK – there have, for example, been calls in recent years for taxes on wealthy people in Europe and the US. Critics argue that such taxes typically encourage HNW people to leave, or cut their business activity, undermining the purpose of the policy.

Wealth advisors appeared cautious, even scornful, of the suggestion that Reeves has changed course.

"The headline writes itself, 'woman shoots herself in foot and is amazed that she can no longer walk'. It seems absurd that the removal of inheritance tax protections for trusts was pushed through in the first place,” Miles Dean, partner and head of international tax at Andersen LLP, said in an emailed comment. “That it was done without any consultation is scandalous, not simply because it shatters the social contract between taxpayers and the state, but because of the completely unrealistic fiscal prediction that £430 million ($579.2 million) of tax revenue would be generated.

"The optics of yet another U-turn are far from good and would surely be greeted with scorn from the opposition parties. They may even make Reeves' position as Chancellor untenable, if she is thought to favour rich foreigners over UK pensioners,” Dean said. 

"If she did do a U-turn on inheritance tax, this would likely include trusts, with the removal of IHT protection proving a bridge too far for many non-doms. It surely will be too little too late though, as those that have left may not be too eager to return. In other words, the horse has bolted and is now grazing in a welcoming meadow that doesn't try to steal their hay,” he said. 

However, a reversal of policy might not stop the exodus or encourage non-doms to return, he said. 

“Non-doms' trust in the government has been shattered to such an extent that interest in the replacement FIG regime is in no way setting the world on fire. It is simply not generous enough to tempt anyone to return,” he said. 

Jeremy Savory, the CEO and founder of Savory & Partners, a family-owned global wealth mobility firm, said: “If the Labour Government wants to stem the mass exodus of millionaires, it needs to scrap its proposals and start again with more competitive measures. 

“The government should consider making a significant policy shift by charging non-doms an annual fee of £300,000, slightly more than competing countries. This fee would fulfil their need to get more tax in from HNWs, whilst being palatable to many wealthy individuals encouraging them to remain in the UK, avoiding the inconvenience and costs of relocating. It will also present an attractive package to HNW individuals currently deterred from moving to the UK.”

“Whilst any changes that can make the UK more internationally competitive are welcome, the real challenge now is restoring trust and stability, particularly as so many in the non-dom community have already left or are still planning to leave," Marc Acheson, global wealth specialist at Utmost Wealth Solutions, said. “The other challenge is how the government plans to balance or navigate any reversal of changes on trusts previously settled by former non-doms, while at the same time proposing to extend inheritance tax to business property, agricultural assets, and even pension funds for others.”