Finance Bill Could Cause Even Greater Wealth Exodus

• The abolition of the non-dom regime is already causing wealth creators to flee the UK at a time when we desperately need to keep them;

• But ahead of the new rules coming into force on the 6th April, a new report from the Adam Smith Institute (ASI) warns that this non-dom exodus could be even worse than anticipated;

• Britain’s High Net Worth Exodus, or ‘WExit’ is already a major cause for concern. High Net Worth Individuals (HNWIs) contribute a disproportionate amount in taxes and business activity;

• But the Finance Bill, as it is currently drafted, will create a punitive and arbitrary set of rules for non-doms;

• In particular, some non doms could be charged an effective tax rate of 67% on their foreign businesses;

• They could also be charged additional taxation by HMRC on any income or capital gains brought over under the Government’s Temporary Repatriation Facility;

• A significant number of non-doms may leave in the face of such uncertainty, creating a hole in the UK’s finances;

• The ASI is calling on the Government to ensure that non-doms will not face these excessive rates of taxation, by preserving the safeguards currently in place and by clarifying that HMRC will not be able to charge additional rates of tax on assets brought over to the UK;

• In an accompanying comment, Andrew Griffith MP, the Shadow Secretary of State for Business and Trade, calls on the Government to ‘act fast to stem the flow of top investors out of the UK.’

As predicted by the Adam Smith Institute, (ASI) the abolition of the non-dom regime is already encouraging HNWIs to flee the UK. According to the ASI’s Millionaires Tracker, the UK is set to lose the greatest proportion of its millionaires in the world by the end of this parliament.

Our High Net Worth Exodus is already a cause for concern. These wealth-creators contribute a disproportionate amount of tax and business activity with the top 1% alone contributing 29.1% of income tax. 

But the situation may be even worse than we thought. According to a new report by the ASI entitled Wealth Exodus, the Government’s Finance Bill, as it is currently drafted, will create a punitive and arbitrary set of rules for non-doms, which risks forcing even more HNWIs to leave. 

Two aspects of the Finance Bill are particularly concerning. Firstly, non-doms could now be charged taxes on sums which vastly exceed their actual income. Currently, if a UK resident owns a foreign company, its profits can be treated- and taxed- like personal income. Non-doms have been shielded by this by the Income Tax Act 2007. But the new Finance Bill will dismantle these safeguards. In the worst case scenario, non-doms could have to pay 45% tax on profits from their foreign companies, plus an additional 39.5% tax on dividends. The ASI warns that this could result in some non-doms paying an effective tax rate of 67% on their overseas businesses.

Secondly, plans for the Temporary Repatriation Facility (TRF) are uncertain and unclear. The TRF is a mechanism designed to encourage non-doms to bring their assets to the UK by offering them a more favourable tax rate for 3 years. But there is concern that income and capital gains which non-doms bring over to the UK could face additional charges from HMRC. This is because HMRC’s default stance is to treat the 45% income tax rate as standard rate, and any lower rates as concessions, which they can override using anti-avoidance mechanisms such as Transactions in Securities (TIS) and General Anti-Abuse Rules. It has not been made clear how the TRF will interact with these HMRC rules and so many non-doms will be understandably concerned that this lack of clarity could give HMRC space to levy additional rates of tax on what they bring over to the UK. HMRC won over 90% of appeals in 2023, so it is very unlikely that non-doms would be able to successfully dispute this if it happened, even if they wanted to. 

Many non-doms will not want to risk facing either of these problems because it could severely impact their businesses, and so will simply decide to leave the UK. This a crisis unfolding in real time for the Treasury. The Chancellor has said that abolishing the non-dom status will raise over £12 billion, but if the Finance Bill causes an even greater exodus, this policy is more likely to actually cost the UK money, leaving a gaping hole in the UK’s finances. 

The ASI’s new report is calling on the Government to urgently:

• Preserve the sections of the Income Tax Act 2007 which protect structures and transactions which were established before 6th April; 

• State unequivocally that any funds which are brought to the UK under the TRF are exempt from additional taxes.

Even with these changes, the UK will be uncompetitive when it comes to attracting wealth-creators. Previous ASI research has also recommended that the UK implements an Italian style flat-fee of £150,000 a year for highly mobile wealthy individuals who are resident, but not domiciled, in the UK. 

Andrew Griffith MP, Shadow Secretary of State for Business and Trade, said: 

“It’s fast becoming clear that Labour are presiding over the biggest brain drain of talent in a generation. Whilst every other economic statistic is going backwards, the number of ambitious people leaving is soaring.

Everyone left in the U.K. is a victim as we lose the jobs, businesses and spending of these wealth creators.

The government must act fast to stem the flow of top investors out of the UK and prevent average taxpayers having to foot the bill for a loss we will all feel.”

Sam Bidwell, Report Author and Director of Research at the Adam Smith Institute, said:

“The Chancellor pledged to restore stability to the nation’s finances. But the Finance Bill will take a hammer to the UK’s already anaemic growth rates, as the abolition of the non-dom regime drives wealth creators from our shores. 

Taxing the foreign businesses of non-doms at rates of up to 67% is the kind of behavior we might expect from an authoritarian regime - not from the birthplace of capitalism. These proposals are nothing short of a slap in the face to the wealth-creators who invest, pay taxes and create jobs in the UK. It’s no wonder that so many of them are considering leaving for good. 

With the proposals coming into force in just 4 days, the government must urgently stop this enormous act of economic self-harm and exempt non-doms from taxes on foreign profits and repatriated funds.

But even that won’t be enough. While these modest reforms may slow the exodus of HNWIs, the UK will remain extremely uncompetitive. To once again attract the brightest and the best, we should consider introducing a flat tax for non-doms, as well as simplifying and lowering the UK’s staggering tax burden. 

-ENDS-

Notes to editors:  

For further comments or to arrange an interview, contact press@adamsmith.org | 0758 477 8207

The relevant articles of the Income Tax Act 2007 are Article 726 and Article 730.

Sam Bidwell is Director of Research at the Adam Smith Institute. 

The Adam Smith Institute is one of the world’s leading think tanks. It is ranked first in the world among independent think tanks and as the best domestic and international economic policy think tank in the UK by the University of Pennsylvania. Independent, non-profit and non-partisan, the Institute is at the forefront of making the case for free markets and a free society, through education, research, publishing, and media outreach.