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The Labour government’s recent announcement at Davos of changes to their (non UK domiciled) ‘non-dom’ policy marks a significant retreat from one of their few concrete tax commitments. Speaking at the World Economic Forum, Chancellor Rachel Reeves revealed plans to increase the generosity of the Temporary Repatriation Facility, designed to help non-doms bring their assets to the UK at a discounted tax rate.
This climbdown is reminiscent of Labour’s recent stance on carried interest reform, where pre-election promises to remove the tax benefits of carried interest have subsequently been watered down, following ‘consultation’ with the private equity ‘community’. The Labour government appears increasingly willing to back away from their own tax reforms in response to pressure from wealthy interest groups, rather than basing policy on empirical evidence.
The myth of the tax-driven wealth exodus
The justification for these changes stems from fears of a supposed “wealth exodus” from the UK. Recent reports from Henley & Partners, based on research conducted by New World Wealth, have fuelled media narratives about wealthy individuals fleeing the country in large numbers due to potential tax changes. However, a closer examination of the evidence reveals critical flaws in this narrative.
Firstly, the scale of emigration needs context. HMRC estimates there are approximately 800,000 “wealthy individuals” in the UK, defined as having incomes of £200k or assets of £2m+. The New World Wealth counts “high-net-worth individuals” as those with liquid investable wealth of USD 1 million or more. While the definitions of these populations aren’t identical, there’s likely significant overlap. Assuming comparable populations, the much-cited figure of 9,500 potential emigrees represents just over 1% of the current UK total. Crucially, this estimate (the methodological basis for which being suspect) doesn’t account for wealthy individuals moving to the UK, making it impossible to determine the net figures of wealthy individuals. Moreover, the 9,500 figure is merely a forecast of how many might leave the UK – not an actual count of departures.
Secondly, the destination data undermines the narrative that individuals who are moving are doing so with tax being a primary motivator. According to the same research, 68% of wealthy emigrants are moving to EU countries, few of which offer a similarly beneficial regime for incomers. Only a small fraction are relocating to traditional tax havens, with 8.4% heading to the UAE and 2% to the Caribbean. Asking respondents whether tax is a factor they considered in making their decision about where to live is not the same as tax changes driving individuals to relocate when they wouldn’t have done otherwise.
The ‘research’ itself identifies numerous non-tax factors influencing these decisions, including:
– Brexit’s impact on financial markets and business opportunities
– The UK’s poor economic recovery post-2008 financial crisis
– The growing dominance of the US and Asia in the tech sector
The only empirical research that has examined the effects of tax changes on the behaviour of wealthy individuals also directly contradicts the narrative of a tax-driven exodus. Academic research by Advani et. al. found that historice substantial tax increases on non-domiciled individuals resulted in only modest increases in emigration. Such evidence is only available after the reform has taken effect and the departures of formerly non-dom residents have been confirmed in the data. Untangling the effect of the change from long term migration patterns makes such analysis harder still.
Putting pressure on the government
Such stories purporting to illustrate a particular tax changing having a dramatic (negative) effect make for an eye catching headline for right leaning media editors, contributing to attempts to pressure the Government into making concessions. This is ironic when the substance of the reform is to remove the concept of domicile is broadly welcome as it has been troublesome and uncertain for both taxpayers and HMRC alike.
In an increasingly desperate attempt to sell the UK as a destination for wealthy investors to move and pledge capital to the UK, the government appears to prioritise the interests of ultra wealthy clients and their tax advisers over commitments their electoral mandate was won on. The chancellor’s statement that “We have been listening to the concerns that have been raised by the non-dom community” raises questions about whose voices are being heard in the policy-making process.
This is concerning. Rather than basing decisions on robust evidence and research, or the principles of fair taxation and removing distortions used by elites to keep their wealth in offshore assets and trusts rather than here in the UK, the government seems to be yielding to pressure from wealthy interest groups. The pattern of retreating from tax commitments – first with carried interest and now with non-dom reform when the public finances are under such strain and when so many areas of tax policy had been ruled out before the election, is troubling.
If we want a fair and effective tax system fundamental reform will be required, and there will be some ‘losers’ – we need Government to be brave and with a long term vision for how the UK treats its citizens with similar levels of income and wealthy. The government’s current approach of bowing to lobbying efforts of powerful interest groups risks undermining both the effectiveness of our tax system and public trust in policymaking.
