Peers call for clarity on tax changes amid warnings over non-dom exodus

The government attributed its ‘tough decisions’ to dealing with a financial ‘black hole’ and argued that these measures are necessary for ensuring a more sustainable economic future.

Having completed its Lords passage on Wednesday the bill gained Royal Assent on Thursday and is now Finance Act 2025.

You can read the full debate here and find further information on the bill/act here.

The Financial Secretary to the Treasury, Lord Livermore, began the debate by arguing that the government inherited a £22 billion shortfall due to ‘unfunded’ commitments from the previous administration. In response, the government took action in the Budget to “wipe the slate clean” and made difficult tax decisions. He told peers that the bill covers three key areas: fulfilling manifesto commitments, making the tax system ‘fairer’ and more sustainable, and supporting health and clean energy.

The Shadow Treasury minister, Baroness Neville-Rolfe, criticised the Budget’s measures and accused the government of breaking its promise to keep taxes low, with the tax burden set to reach 38.2% by 2029-30. She called VAT on school fees “a new, punitive tax on education”, adding that its imposition part-way through the academic year “will cause—and has already caused—significant disruption to the education of thousands of children”.

The shadow minister said that the bill makes the UK tax system less competitive, noting the raising of capital gains tax rates and abolition of the remittance basis for non-doms. She noted that the government had amended transitional provisions for remittance by non-doms during the bill’s Commons stages. “However, I have been advised by the Chartered Institute of Taxation that this is also defective, so that, for example, individuals who brought money into the UK to buy a house several years ago would now face a big retrospective tax charge. To stop yet further departures from the UK to avoid such perverse effects, could the minister make a statement that the government recognise the issue and commit to a further amendment in the next Finance Bill?” she asked.

The shadow minister also asked about the future of the digital services tax amid U.S. trade concerns. She stated: “I was in favour of the introduction of the tax as a means of reducing the discrimination against physical retail”. Concluding her remarks she asked for the government’s commitment that they will not extend the freeze of income tax and national insurance contribution thresholds beyond April 2028.

Lord Eatwell (Lab) expressed concerns about the complexity of the tax system, arguing that “[c]omplexity generates tax avoidance and undermines any sense of fairness in taxation”. He criticised past failed efforts to simplify taxation, including the abolition of the Office of Tax Simplification. To address the issue, he proposed establishing a “royal commission on taxation” to assess the system’s efficiency, apply Adam Smith’s tax principles, and recommend reforms. He believed that: “Establishing the commission now will produce the non-partisan proposals that will provide the framework for the radical tax reform that Britain desperately needs and avoid the dangerous trap of piecemeal changes”.

While welcoming the retention of 100% expensing Baroness Coffey (Con) questioned the government’s broader strategy behind certain green tax measures. She suggested that the plastic packaging tax, ‘just’ rising with inflation, might not be effectively driving the ‘intended’ shift toward 30% recycled content. She called for the reviewing of its impact as well as praising landfill tax reform for successfully reducing landfill use.

Lord Markham (Con) provided another voice warning that changes to non-dom tax rules could drive high-net-worth individuals out of the UK. He outlined some issues including the high-net-worth non-doms being able to easily relocate and tax advisers cautioning these individuals against remaining in the UK. He said some advisers fear that transfer of assets from abroad changes, intended to tax non-doms only on future overseas earnings, could be applied retrospectively. He urged HMRC to urgently provide clarity on this issue. Similarly, with regards to the temporary repatriation facility, designed to encourage asset transfers to the UK at a reduced tax rate, he warned that “tax advisers are highlighting the risk that, in future, HMRC or the courts might reclassify this as a tax avoidance scheme”.

Lord Leigh of Hurley (Con), a member of the Chartered Institute of Taxation, expressed concern over President Trump’s stance on OECD pillars 1 and 2, particularly as the UK Treasury expects to raise £2.8 billion from pillar 2. He questioned what plans the government has to protect this revenue, given the US intention to implement ‘protective measures’.

Lord Leigh echoed Lord Markham’s concerns about tax changes for non-doms, calling them a “disaster”. He cited a survey by Oxford Economics that found that two-thirds of remaining non-doms are considering leaving and questioned the Chancellor’s forecast of raising £13 billion over five years. He endorsed the “serious concerns about deficiencies in the legislation regarding so-called double remittances” that Lady Neville-Rolfe had raised, saying these needed to be “urgently addressed in future Finance Bills”.

Likewise, Lord Altrincham (Con) warned that the migration of wealthy individuals could reduce the tax yield, saying: “migrations out of the country of higher rate taxpayers in the tens of thousands could be very dilutive to our tax base”. He also discussed changes in inheritance tax rules, arguing that they have been moved to a “residency basis” rather than domicile. This shift could “create a tremendous incentive for certain types of wealthy people to leave the UK” to avoid inheritance tax.

“Stamp duty is a terrible tax economically speaking” stated Baroness Penn (Con), a former minister, who cited the Institute of Fiscal Studies’ (IFS) warning that the measure will “result in even more unaffordable rents”. She questioned whether the government’s own impact assessment aligned with the IFS’s concerns.

Lord Davies of Brixton (Lab) raised concerns about the continued freeze on income tax personal allowances until 2029, particularly its impact on state pension recipients. He suggested that freezing allowances is “a good way of surreptitiously increasing the tax burden without touching the standard rate.” However, he warned that this policy is creating future problems and referenced rumours that the freeze might be extended beyond 2028-29 to meet fiscal targets. He asked the minister to confirm whether the government still intends to raise personal allowances at the end of the current freeze period.

Baroness Lawlor (Con) reported the negative impact of higher taxes on businesses, individuals, and the charitable and educational sectors and criticised the bill’s introduction of VAT on independent schools. She suggested that early reports confirm that schools are cutting staff, reducing bursaries, limiting subject offerings, and lowering pay and pensions.

A Labour peer, Lord Sikka, also disapproved of the bill for failing to reduce taxes on the poorest, highlighting the disparity in tax burdens between income groups. He argued that the richest fifth of households will pay a significantly smaller proportion of their income in taxes compared to the poorest fifth. He also believed that the Chancellor missed an opportunity to cut VAT on domestic fuel or reduce the standard VAT rate, which could have helped the poorest.

Furthermore, Lord Sikka criticised the decision not to impose the promised 45% tax rate on private equity managers’ carried interest, saying: “Who hears the cries of the less well off? They too are crying for concessions”.

He raised concerns about the ongoing inequities in the tax system, citing the lower tax rates for capital gains and dividends compared to wages, as well as the loopholes allowing wealthy professionals, such as accountants and lawyers, to avoid national insurance contributions through limited liability partnerships (LLPs). He asked why these tax ‘anomalies’ have not been eradicated.

Lib Dem spokesperson Baroness Kramer (Lib Dem) expressed concerns about several aspects of the Finance Bill including VAT on independent school fees and the increase in alcohol duty. She criticised the government for what she said was the delayed implementation of the undertaxed profits rule, despite the expected tax revenue of over £2 billion per year from the measure. The government “might just as well have written that they will close their eyes to tax avoidance by the US mega tech companies because they are afraid to annoy President Trump and Elon Musk. Will the Minister explain to me why—at a time when we are looking at cuts in benefits to disabled people, there is pressure on the public sector in every direction and we have to increase defence—we will make a £2.8 billion annual gift to tax avoiders when these other measures are necessary?”

Responding to the concerns about the non-dom legislation, Lord Livermore suggested that the new regime is internationally competitive and focused on attracting the best talent and investment to the UK. He stated that: “During the passage of the bill… the government tabled a number of minor technical changes and administrative easements to ensure that the new regime works as intended. As part of this, we have made changes to ensure that no tax will be due in any past or future tax year for taxpayers in circumstances where they were previously UK-resident and taxed on the remittance basis; they remitted foreign income or gains during a period of long-term non-residence before 6 April 2025”.  He added that the existing remittance rules will continue to apply in circumstances not covered by this amendment so that, where a non-taxable remittance has been made prior to 6 April 2025, a second remittance of the same income or gains remains taxable.

On concerns raised about the changes to the transfer of assets abroad, the minister said that the legislation is a “wide-ranging anti-avoidance provision” aimed at preventing individuals who are UK residents from avoiding tax liability by transferring assets to a person abroad. He reassured members that the changes to these rules will not displace the effect of the old remittance basis rules for the years in which they had effect.

With regards to the concern that the temporary repatriation facility could lead to retrospective taxation, the minister confirmed that the rates are set out in the bill and will be set at 12% for the tax years 2025-26 and 2026-27, and at 15% for 2027-28.

On the digital services tax, Lord Livermore said that the government is looking forward to working with the new US Administration to understand their concerns regarding this issue, adding that the UK remains committed to removing a digital services tax once the pillar 1 global solution on international tax is in place.

The bill passed its second reading without a vote and was unamended in the Lords, in accordance with parliamentary rules.