The inheritance tax loophole ‘accelerating’ an exodus of the wealthy: Advisers reveal older clients are preparing to leave Britain by April because of changes to non-dom rules_Nhy
A surge of wealthy older people is preparing to leave Britain before April to take advantage of an inheritance tax loophole introduced in last month’s Budget.
Tax advisers said they had clients who were planning to move overseas ‘almost straight away’ as a result of an IHT exemption that has been opened up by Labour‘s chances to non-dom rules.
Rachel Reeves confirmed the long-trailed abolition of the non-dom system, which exempts UK tax residents whose permanent home or ‘domicile’ is abroad from paying British tax on their foreign income.
Her Budget also introduced new rules that require people to live outside the UK for three to 10 years before they can avoid having to pay inheritance tax (IHT) on their foreign assets at a rate of 40 per cent.
However, if someone emigrates in the current tax year they will only be liable for IHT on their overseas possessions for three years.
Tax advisers said they had clients who were planning to move overseas ‘almost straight away’ as a result of an IHT exemption that has been opened up. File pic
Rachel Reeves confirmed the long-trailed abolition of the non-dom system, which exempts UK tax residents whose permanent home or ‘domicile’ is abroad from paying British tax on their foreign income
‘[The rules are] basically saying if you want to go, you have to go this tax year,’ Philip Munro, partner at law firm Withers, told the Financial Times, adding that the new provision had ‘crystallised’ many non-doms’ decision to leave Britain.
Edward Hayes, director at London law firm Burges Salmon, said the rule change meant ‘a lot of clients are in the position where they either leave almost straight away… or stay longer and face the maximum 10-year [wait] when they go in the future’.
Labour had previously wanted to make non-doms emigrating from Britain liable for IHT on their international assets for 10 years after leaving.
But following lobbying she changed this timeframe to between three and 10 years, depending on how long the person has lived in the UK.
Non-dom, short for non-domiciled, relates to someone who lives in Britain but whose permanent tax residence is registered abroad. Those with the status do not have to pay UK taxes on their foreign earnings and assets.
At present, an individual’s domicile is where they consider their permanent home to be.
It is possible to change a UK-domiciled status by acquiring a ‘domicile of choice’ in another country, but this is a complicated process.
Experts have previously warned that Ms Reeves’ decision to abolish non-dom status in her Budget will spark an exodus of wealth creators.
Maxwell Marlow, of the Adam Smith Institute, said: ‘The abolition of the non-dom regime will drive away highly mobile wealth creators and so their tax contribution will decrease and they will invest less in our economy.’
Nigel Green, chief executive of financial advisory firm deVere Group, warned the exodus will leave ‘lasting scars on Britain’s economy’. He added: ‘The UK has long benefited from the economic contributions of non-doms, whose direct and indirect investments and business activities have been integral to the nation’s prosperity.
‘The allure of the non-dom tax status has been a pivotal factor in attracting international talent and creating a dynamic business environment.
‘Its removal is likely to signal a shift in the global perception of the UK as a favourable destination for wealth creation and business development.’
The new system replaces domicile with residency, meaning the majority of people who have lived abroad for more than 10 years will not pay IHT on their foreign assets
Former Conservative chancellor Jeremy Hunt introduced plans to scrap the regime in his Budget earlier this year. But Ms Reeves has gone further to close a so-called loophole that allowed those with the tax status to protect their assets in an offshore trust.
She has unveiled a replacement scheme to encourage wealthy foreigners and overseas investors to come to Britain temporarily.
But official estimates forecast that more non-doms will leave the country under Ms Reeves’ plan than the one announced by Mr Hunt in March.
The Office for Budget Responsibility said her decision will ‘slightly increase migration’ relative to the changes announced by Hunt earlier this year. It estimated that 12 per cent of non-doms who are ineligible for the new regime will leave the country – up from 10 per cent following Mr Hunt’s plan.
Marcelo Goulart, of the First Alliance group, said the reform was a ‘colossal misjudgement’. He added: ‘[It has] exacerbated the damage that has already been done to the UK’s reputation as a prime jurisdiction for wealthy international people.’
An HM Treasury spokesperson said: ‘Replacing the outdated non-dom tax regime with a new internationally competitive new residence-based system addresses unfairness in our tax system, attracts the best talent and investment to the UK, and ensures everyone who is a long-term resident in the UK pays their taxes here.
‘This was a once-in-a-Parliament Budget to wipe the slate clean, and our package of changes to this regime in the Autumn Budget is forecast to raise £12.7 billion over the next five years to help fill the £22 billion fiscal hole and rebuild our public services.’
