Scrapping non-dom tax perk will drive out wealthy, warns IFS

JEREMY HUNT risks driving the wealthy away from Britain and costing the Treasury money if he scraps nondom tax status in this week’s Budget, a leading think tank has warned.

The Institute for Fiscal Studies (IFS) said that rushing through reform of the colonial-era tax scheme could backfire and raise less money than expected.

Abolishing the regime, which allows those classed as non-domiciled to live in the UK for 15 years without paying tax on assets held abroad, would make the UK a less attractive location, Stuart Adam, an IFS senior economist, said.

Mr Adam added: “The more ambitious tax-raising reforms are, the greater the potential revenue yield – but also the greater the risk that the UK would attract fewer non-doms and lose the tax revenue they bring in.”

Mr Hunt, the Chancellor, is scrambling to find money to announce preelection tax cuts in tomorrow’s Budget. He is set to extend the windfall tax on energy firms for another year, raising millions of pounds and helping him to cut personal tax – either National Insurance or income tax – by 2p.

Mr Hunt is also expected to use the Budget to freeze fuel duty for the 14th year in a row, meaning it will not rise by 5p a litre. He is expected to squeeze public spending to help fund this, with councils told to draw up plans by the end of July setting out how they will improve performance and reduce wasteful spending. This includes unnecessary spending on consultants and on “discredited equality, diversion and inclusion initiatives”.

A Treasury source said: “Just as we’re clamping down on central government waste, we expect councils to spend local ratepayers’ money wisely, too.”

The IFS also warned that the NHS was facing its biggest cut in more than half a century unless the Budget handed billions more pounds to the service.

A raid on non-doms would mean Mr Hunt copying one of Labour’s key policies, a move that would leave the Opposition with less money for other spending plans if they win the election.

The Chancellor is believed to be looking at a range of options, including an Italian-style system in which non-doms pay £150,000 to live in the UK without being taxed on foreign income. But the IFS warned both Mr Hunt and Rachel Reeves, the shadow chancellor, that it was hard to predict how much revenue might be raised as a result.

Mr Adam said that the current system was far too complex and disincentivised people from bringing their wealth to the UK. However, he urged ministers to avoid knee-jerk changes. He said: “Whatever the reform, it should be

‘Changing the regime in order to fund preelection tax cuts would not be a good reason’ ‘I find some of those initiatives very hard to defend’

based on a careful weighing of the longrun pros and cons. Changing the regime in order to fund pre-election tax cuts would not be a good reason for making such a change, whatever the pros and cons of any reform adopted.”

There are some 37,000 non-doms in the UK who have chosen be taxed on a so-called remittance basis, meaning taxes only apply to foreign assets brought into the UK. Between them, they paid £6billion in income tax, National Insurance contributions and capital gains tax in 2020-21 – an average of £170,000 per person.

The IFS said claims by politicians about how much money any reform would raise were shrouded in uncertainty, as little is known about how much foreign income non-doms have, and how sensitive they would be to new rules. Labour has said it would seek to modernise the regime and make it less generous, leaving in place only exemptions for those staying in the UK in the short-term.

But tax lawyers working with ultrarich clients have already warned of a drop-off in inquiries from foreigners considering coming to the UK amid concerns over Labour’s plans.

Meanwhile, the IFS also warned that the NHS faced the deepest cuts since the 1970s unless Mr Hunt supplied billions of pounds more in the Budget.

The think tank said months of high inflation meant that hospitals were facing a 1.2 per cent real terms cut in dayto-day spending. This would be the largest reduction since the 1976 crisis when Labour had to go cap in hand to the International Monetary Fund, except for the last two years as temporary Covid funding expired.

The IFS said: “Planned spending in 2024-25 [for the NHS] will almost certainly need to be topped up if cuts to staffing and service provision are to be avoided... Holding back funding in reserve, as the UK government is currently doing, and then potentially making in-year top-ups during the course of the year can provide more flexibility to respond to changing circumstances.”

“However, given the evident pressures on the NHS, it is almost certain that health spending will be topped up significantly again during 2024-25. Leaving it until near the end of the year to confirm this, as has been the case in 2023-24, would make it harder than it need be for managers to plan the efficient delivery of care over the year ahead.”

The Chancellor will also use the Budget to tell local authorities to draw up plans to improve service performance and reduce wasteful spending.

A study two years ago found that across 397 councils, there were 794 equality, diversity and inclusion members of staff. Conservative Way Forward also found that the average cost of equality schemes per council was £67,000 – totalling £30 million a year across the country. In an interview with The Sunday Telegraph, Mr Hunt criticised “woke” spending by Whitehall departments, saying: “I find some of those initiatives very hard to defend.”

But councils warned the government that unless they get more funding in the Budget, more potholes will go unfilled and more streetlights will be dimmed.

The vast majority of councils are expected to put up their bills by the maximum 5 per cent allowed next month.

Some local authorities which have declared themselves effectively bankrupt, such as Birmingham, are set to increase their bills by up to 10 per cent.