Basing its maths on how other countries fared when HNW foreigners were brought under heavier tax burdens, the Adam Smith Institute reckons that the end of the UK's non-dom system will drain billions of pounds from the economy. At issue is how perceived fairness squares with hard financial realities.

The UK government’s move to abolish non-domicile tax status could cost the economy £6.5 billion (£8.42 billion) by 2035 and thousands of jobs, the Adam Smith Institute, a UK think tank that advocates for free markets, said in a report yesterday. 

The ASI’s study comes hard on the heels of its report saying that the UK is slated to lose significant numbers of HNW individuals because they are fleeing higher taxes. 

The latest report comes out ahead of the 30 October Autumn Budget statement. Already, there is considerable speculation on how exactly finance minister Rachel Reeves will end the non-dom system. A particular concern has been the treatment of non-doms for inheritance tax purposes. (See here for an overview.)

At the core of the issue is tension between a desire for perceived fairness in tax policy and a need to raise the optimum amount of revenue. 

Critics of the system say it is out of date (it goes back to the late 18th century) and enables non-doms to pay their fair share of tax; supporters say reform, not abolition, makes more sense and that non-doms bring in net revenues to the UK, and are not a drain on the public purse.

Since the election on 4 July bringing the Labour Party to government, the end of the system has looked inevitable. Already, in an attempt to steal Labour’s thunder, former UK Chancellor of the Exchequer Jeremy Hunt signalled that he would end it in his last Budget statement in the spring, and replace it with a residency-based system. There have also been calls to reform, not scrap, the system, such as here, from Withers, the law firm. 

The impact
The ASI said it expects non-doms to leave for reasons such as the end of their existing tax status, rising taxes on HNW people in general, weak UK economic growth, and a hostile climate towards wealth creators.

The ASI proposes an Italian-style annual flat fee of £150,000 for highly mobile wealthy individuals who are resident, but not domiciled, in the UK. If all current non-doms were willing and able to afford this fee, this could raise £12.45 billion a year in tax revenue, while attracting more non-doms to the UK, the ASI said. 

If the system is ended, 5,800 of the UK’s 21,100 “remittance basis” non-doms – those taxed only on income and gains made in the UK – would leave the country. This estimate of a 26 per cent drop is based on evidence from Denmark’s introduction of a targeted tax increase for high-income foreigners.

Under this scenario, the ASI forecasts that the UK economy will be losing £600 million a year by 2030 including some 23,000 jobs. By 2035, Britain will be losing almost £1.3 billion every year. This will lead to a cumulative loss of £6.52 billion.

At present, the top 1 per cent of earners, many of whom are non-doms, contribute 29.1 per cent of total income tax revenues, the ASI said.

Among advocates of reform to the system is legal and family advisor figure Philip Marcovici, who has suggested offering HNW foreigners a deal under which they commit to investing long-term in business in the UK, pay an up-front lump sum, in exchange for a low IHT bill upon death. 

See more commentary on the topic of non-doms here, here and here. The editor of this publication has argued that abolishing the system would be a mistake.

Separately, a report on 21 October from the Tax Foundation, a Washington DC-based think tank, puts the UK at 30th place for overall tax competiveness, and the US at 18th. The Baltic state of Estonia, famous for its flat-tax system, is in top position, followed by Latvia, New Zealand and Switzerland, respectively. The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates low. A neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions.

Critics of the non-dom system
The left-leaning Institute for Public Policy Research, which is thought to be influential on Labour Party thinking, has called for what it says is a fairer UK tax code. In 2018 it said that the the non-dom system should be axed: “There is no economic justification for allowing residents of the UK to claim residency of another jurisdiction for tax purposes. Doing so is regressive and increases opportunities for avoidance, particularly through the use of trusts.” 

The IPPR paper (9 October 2018), entitled A Wealth of Difference: Reforming the taxation of wealth, also said the UK's inheritance tax system should be scrapped and replaced with a lifetime donee gift-based system of tax.

The IPPR also proposed to replace existing council taxes and business rates (to pay for local municipalities) with a land value tax.