Labour’s flagship “non-dom” policy was largely copied and pasted from the Conservatives even though it contains “basic errors” and risks damaging the UK’s financial sector, Whitehall sources have told the Guardian.
They claimed that the chancellor, Rachel Reeves, dismissed concerns raised by Whitehall officials about the potential negative impact of the policy, and is still set on introducing it in the manner Hunt pledged. “This is copy-pasting basic errors into the new policy,” one Whitehall source said.
Labour has also promised to go further by ending non-dom linked inheritance tax breaks that allow the rich to shield their wealth in offshore trusts. Labour planned to spend the money raised on schools and the NHS.
A Treasury spokesperson said they could not comment on tax measures before the 30 October budget but added, without detailing specifics, that some of the claims were “inaccurate and misleading”.
Reeves had hoped that closing extra loopholes used by non-doms would raise £1bn, but the Guardian revealed this week that the policy might actually reduce the tax take for the exchequer by triggering an exodus of the super-rich.
Labour has long said it wants to raise more tax from wealthy people who live in the UK but have their tax residence elsewhere, via so-called “non-domiciled” tax status. There are about 74,000 non-doms in the UK.
The tax break triggered outrage after it was revealed in 2022 that it was used by Akshata Murty, the wife of the then chancellor Rishi Sunak and the daughter of the Indian IT billionaire NR Narayana Murthy.
In March, the then chancellor Jeremy Hunt said he would also cut the tax break and use the expected revenue – which was given a “highly uncertain” £3.2bn estimate by the Office for Budget Responsibility – to help fund cuts to national insurance.
Hunt planned to make non-doms’ overseas income subject to UK tax after four years rather than the current 15.
Labour then added tighter rules on non-doms – particularly on their inheritance – by replacing the tax break with a new regime.
While the government has suggested it may reconsider how it taxes non-doms before the policy is implemented in April, sources said it was still largely mirroring the former government’s flawed approach.
Officials are understood to have advised Reeves that allowing non-doms to live in the UK for five years before taxing their overseas income, rather than four, could help persuade them not to flee the UK and raise much more money.
However, Hunt’s team was determined to cut the period to four years to make his national insurance cuts work.
One Whitehall source said: “Officials have advised her not to just adopt Hunt’s position of four years, but she said she wanted to keep to it. This is copy-pasting basic errors into the new policy”.
Reeves was also warned that another downside to imposing UK taxes on non-doms after four years is that a person can qualify for permanent residency if they live continuously in the country for five years – making them less likely to quit the UK.
Labour has also gone further than the Conservatives by targeting non-doms’ inheritance tax benefits, announcing in its manifesto that it would remove a protection that insulated their assets from death taxes if they were already in trusts.
Instead, Labour plans to make non-doms liable for death taxes 10 years after they have left the UK.
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Reeves’ team were concerned about any step that made them seem “softer than the Tories”, Whitehall sources said. They added that there are few experts focused on non-doms in the Treasury after an informal working group comprising senior tax officials was disbanded earlier this year. A Treasury source said extra staff had been deployed to work on the policy area and denied claims that a policy group was disbanded.
The tax break rose sharply up the political agenda when it was revealed that Murty was paying up to £30,000 a year to retain the status in order to avoid tax on her global income, despite living in No 11 Downing Street.
A new regime will scrap the tax status that has its origins in Britain’s offshore slavery-fuelled industry, whereby plantation owners shaped laws to allow them to visit “home” without having to pay taxes on their offshore income. The requirements for qualifying for the status are often vague, but most often depend on where a person’s father is born.
The tax-break has become a significant part of the City of London’s financial sector, with one-in-five bankers using the status. The non-dom regime has often been presented as a sweetener for Wall Street bankers transferring to the UK, and is also used by Premier League footballers.
Tax advisers and lobbyists told the Guardian than even five years would have been a short period relative to similar regimes in Spain, Italy, and Switzerland, which respectively allow non-doms six years, 15 and indefinite grace periods before someone’s worldwide earnings become subject to domestic taxes.
The new tax break will be free to claim, rather than the present regime, which in its latter years costs £30,000 a year.
Two finance chiefs at world-renowned British public schools also told the Guardian that they were more concerned about the impact of scrapping non-dom status than they were by Labour’s plans to charge VAT on private school fees.
Having a child in education in the UK can be a test for determining whether or not someone might be considered resident for tax purposes.
A head of HR at a Wall Street bank said that US staff were being put off transfers to London, for fear of falling under the UK’s inheritance tax regime.
A Treasury spokesperson said: “These claims are inaccurate and misleading. This government is taking a different approach on non-doms to raise revenue for our public services, which is clear in the manifesto. Tax and spend decisions will be published in the budget on 30 October.”