The chancellor, Rachel Reeves, is said to be looking to reverse her decision to levy inheritance tax (IHT) on the overseas estates of non-domiciled residents. Since April the global assets of those who have lived in the UK for 10 of the past 20 tax years, but who have a permanent home and pay most of their tax outside the UK, have been subject to 40 per cent IHT when they die. But the policy, and other non-dom taxes, have been criticised for driving millionaires away. We ask if the policy is fair.
It is wrong that non-doms should be forced to pay inheritance tax (IHT) on their overseas assets. Unlike income tax, which is paid each year, IHT will generally be a one-off tax.
It is therefore appropriate for it to be levied by the jurisdiction with which the individual has the closest connections, rather than where they happen to be temporarily resident when they die.
While there can be complications with how domicile is ascertained, in most cases a domicile will be the country with which the person’s ties are the strongest.
Regardless of who it is levied on, IHT is already unpopular. Most people in the UK believe that it is unfair to tax someone’s estate after their death. Countries such as Australia, Sweden and Norway don’t have IHT.
The argument for IHT is that it reduces wealth inequality. While this may make sense when perceived through a domestic lens, it starts to fall apart when looked at with an international outlook.
This argument presupposes that those inheriting the estate will also be resident in the UK. Wealth equality will not be achieved by taxing the estate of a UK resident, if the recipient of the funds actually lives on the other side of the world.
On the flip side, a UK resident and domiciled person could inherit funds from an Australian relative without any IHT being paid.
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Another argument for IHT is the revenue it generates for the public finances. However, we can only raise taxes from non-doms if they move to the UK in the first place. The prospect of paying 40 per cent IHT instead of 0 per cent will discourage many from moving here, and encourage those already here to leave.
The result is the UK missing out on income tax, capital gains tax, VAT and stamp duty that these wealthy individuals would have paid, leaving a huge hole in the Treasury’s coffers.
Yes
Alex Cobham, the chief executive of the Tax Justice Network, which campaigns for fairer taxes
Not having IHT is like having the caste system — that’s what then-World Bank chief economist Kaushik Basu once told me. What he meant was that you very quickly damage social mobility and end up with rigidly embedded inequalities that hurt us all.
If non-doms don’t pay inheritance tax on global assets, in at least one country, this will further embed these inequalities and make the gap between rich and poor greater.
Just as important a question is to ask, how we normalised expecting the very wealthiest to contribute the least in the UK?
We don’t flinch when a group of the wealthiest is referred to by the generous tax-exempt status they have been given — the “non-doms”. And then we fret at the idea of them leaving, even though the spurious justification for their status is that they’re not supposed to be permanent residents anyway.
Non-doms should be asked to contribute an amount of tax on their wealth, including that held overseas, that is still far less than most others pitch in. And no, this won’t make millionaires leave.
First, because the millionaire “exodus” is not real. The millionaires supposedly leaving the UK — some of which we’re simply told to assume are non-doms — represent just 0.6 per cent of the total milionaires. In other words, almost 100 per cent of UK millionaires are choosing to stay.
Last year we found 10,900 news reports about a millionaire “exodus” — the equivalent of about 30 pieces a day.
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In our work, we have found a number of issues with some of the research that these reports are based on, including figures being based on LinkedIn status updates, not actual migration, and figures that are heavily extrapolated from unrepresentative samples.
Second, we have actual evidence to go on. Reforms by the former Conservative chancellor Jeremy Hunt led some non-doms to pay an average of 50 per cent more income tax. But a recent study by the University of Warwick and the London School of Economics found that fewer than 5 per cent of those affected chose to move.
Should we expect a bigger migration in response to plans to make inheritance taxes slightly fairer — that is, slightly more effective on some of the most wealthy? It’s far from obvious.
The government would do better to think about how it can help to create a healthier, happier society. Fairer taxes are a key part.