Keir Starmer’s promised tax crackdown on non-doms could yield no extra funds for the Treasury, leaving a £1bn hole in the government’s planned spending for schools and hospitals.
Labour planned to use the money raised from wealthy individuals who are registered overseas for tax purposes to invest in ailing public services.
But the Guardian understands that Treasury officials fear estimates due to be released by the government’s spending watchdog may suggest the policy will fail to raise any money because of the impact of the super-rich non-domiciles leaving the UK.
The Office for Budget Responsibility (OBR) originally forecast that scrapping the tax break for wealthy foreigners could raise about £3.2bn a year – though this was deemed to be “highly uncertain” as wealthy people could either leave Britain or find ways to avoid the clampdown.
After the Conservatives unexpectedly announced last year that they were phasing out the regime, Labour said they still hoped they could raise an estimated £2.6bn over the course of a parliament by clamping down on loopholes.
Labour later predicted that implementing its changes could raise an initial £1bn in the first year, which would be put towards funding universal school breakfast clubs and more hospital and dental appointments.
However, senior government sources said they feared the OBR may forecast that the measure would cost the government revenue rather than raise it, because of the number of non-doms expected to limit their time in the UK.
The chancellor, Rachel Reeves, is understood to be minded to press ahead with the tax changes at next month’s budget and has publicly made the moral case about the contribution she believes the super-rich must make.
A Treasury source said ministers would listen to what the OBR said on tax, with the priority being to raise revenue.
Labour originally proposed the scrapping of non-dom status but in March 2024 the then Conservative chancellor, Jeremy Hunt, adopted the policy and said the government would phase out the system, under which people classified as not domiciled in the UK pay no UK tax on overseas earnings.
Hunt’s plan set out that those who move to the UK from April 2025 would be exempted from the new regime for four years, but would be subject to normal UK tax laws after that period. There will be a two-year transition period for current non-doms.
Labour has said that it will go further than Hunt’s changes by removing a 50% discount in the first year of the new rules and also making inheritance tax payable on foreign assets held in a trust. About 74,000 people claimed non-dom status in 2022-23.
Conservative sources have long claimed that Reeves will not make what she has suggested from the proposed tax changes.
Tory officials told the Financial Times earlier in the summer that their Treasury analysis concluded that removing trust protections from inheritance tax would raise only £50m-£100m a year.
But some economists have said that dire warnings of the super-rich fleeing the UK for other, more generous, tax regimes are overblown. Arun Advani, an associate professor at Warwick University who has advised Labour and the previous government on tax and wealth, cites the comparative lack of emigration by super-rich individuals when similar changes made in 2017. Then, the non-dom rules were changed to mean the status could not be claimed if someone had been a UK resident for 15 out of the previous 20 years.
“For those that were affected, this reduced their post-tax incomes by almost a fifth, so if everyone was going to flee, this would have been the time to do it,” Advani wrote in the Guardian earlier this year.
“What we saw was that a few people did leave, but the numbers were relatively small. In any given year, about 5% of people affected by the reform would be expected to leave anyway, because this group is pretty mobile. The reform increased this to 10% …
“The vast majority of non-doms are actually in the UK to work, and are making very high incomes, be that as bankers, footballers or CEOs. These jobs pay a lot in the UK, more than they would get elsewhere, and so for most non-doms it isn’t financially sensible for these people to leave.”
In October’s budget, Reeves is considering changing how the government’s fiscal rules are calculated to allow billions of pounds more in capital spending, according to government sources.
This could unlock new billions to change the way the government’s five-year debt rule is assessed in a way that could allow more spending on housing, roads and hospitals.
She is considering plans to move Labour’s new institutions, the national wealth fund and GB Energy, off the government’s books. Andy King, a former senior official at the OBR, has said that could give her another £15bn more headroom for borrowing.
Speaking in New York on Wednesday, Keir Starmer also strongly suggested the government would be changing its fiscal rules to allow more borrowing for investment.
Pressed on whether Reeves’s speech to conference had implied there would be adjustments, he said: “I’m not going to get ahead of the budget, but obviously there’s a difference between the day-to-day spend and the borrowing [for] investment.”
On Wednesday, the OECD thinktank gave Reeves an unexpected boost by saying the UK should rewrite its fiscal rules because the framework of a five-year rolling basis discouraged long-term public investment that would drive growth. It called the rules “short-termist.”
