Labour faces non-dom ‘black hole’, Tories claim

Labour’s Rachel Reeves will raise hundreds of millions of pounds less than expected from her non-dom inheritance tax crackdown, leaving the shadow chancellor facing a financial “black hole”, the Conservatives have claimed.

Tory officials said Treasury analysis, conducted for chancellor Jeremy Hunt before the March Budget, concluded that removing trust protections from inheritance tax would raise only £50mn-£100mn a year, rather than the £430mn claimed by Labour.

Tory sources said Hunt had considered the move in his Budget, but the Treasury had warned that closing the loophole would “incentivise certain wealthy people to leave the UK”.

But Labour insisted its costings were “rigorous”, while some independent tax experts argued that the Treasury’s “speculative” calculations appeared too low.

Hunt abolished non-dom status in his March Budget, copying a Labour policy, but left open a carve-out that allowed non-doms who will lose benefits from next April to shield foreign assets held in a trust from inheritance tax permanently.

That loophole was targeted by Reeves last month, as she set out plans for a tougher crackdown on non-doms to help plug a gap in funding for Labour’s health and education pledges, a hole created by Hunt stealing her policies.

A Conservative official claimed that the Treasury costing — if correct — would create a £330mn-a-year funding gap over the five years of the forecast period, adding: “Labour will have to fill this £1.6bn black hole in their plans with tax rises elsewhere.”

A Labour spokesman said the Conservatives had always under played the likely gains for the exchequer from ending tax perks for non-doms. 

The spokesman added: “Labour is committed to closing the loopholes in the government’s plan to end the non-dom status and to invest that money in our NHS. We have put forward a credible and comprehensive plan for how we will deliver this in government.”

Tax experts also questioned the Treasury analysis.

Emma Chamberlain, a barrister at Pump Court Tax Chambers who specialises in non-dom work and trusts, said she was surprised the Treasury’s projection of removing inheritance tax protection from existing trusts was so low.

She suggested the government would make more than £100mn a year from it, but stressed that calculations are intrinsically difficult.

“I think all of this is very speculative because we don’t know how much excluded property is held in trusts,” she said. “We [also] don’t know the effect . . . of people leaving due to uncertainty over the tax changes, [and] the deterrence effect stopping people from coming here in the first place,” she said.

Arun Advani, an associate professor at the University of Warwick, whose research specialises in non-doms, also said the Treasury figures sounded “pretty low”. 

He added it was “incumbent on government and civil servants” to release the assumptions behind their projections so that analysts, such as think tanks, tax practitioners and academics, could assess them.

However Chris Etherington, partner at accounting firm RSM, said that many non-doms were already considering their options, and if Labour’s plans materialised it could lead to a “large outflow of wealthy foreigners leaving the UK”. 

He said: “There’s a huge asterisk against all of these numbers because they will be dictated by what people will do in practice. I think they will vote with their feet.”

The disclosure of the Treasury costing comes as Hunt prepares to launch a consultation on the detailed implementation of his wider plan to axe the colonial-era non-dom regime, which he expects to raise £3.6bn by 2027-28.

Hunt’s surprise move was partly intended to fund a 2p cut in national insurance, and partly to create a political trap for Labour, forcing Reeves to explain how she would raise the money to fund extra NHS treatments and free school breakfast clubs.

Reeves explained in April that her tougher crackdown on non-doms would help to fill the gap, along with a crackdown on tax avoidance and evasion, which she claimed would bring in £5.1bn a year by the end of the parliament.