What does the elimination of the ‘non-dom’ tax break mean for families of wealth?

In the controversial 2024 Spring Budget, Britain’s Chancellor of the Exchequer Jeremy Hunt announced plans to abolish the current 'non-dom' tax regime, which offers favourable taxation terms to individuals whose permanent home is considered to be outside the UK.

Hitherto allowing non-domiciles to pay tax on their UK income and gains in the same way as UK domiciles, but only pay tax on their foreign income or gains (FIG) when they are brought to the UK, Hunt’s new reforms will remove the preferential tax treatment from April 2025 and replace it with a “modernised regime that is simpler and fairer”, according to a statement released by the UK Treasury.

“The government wants the UK to have a fair and internationally competitive tax system, focused on attracting talented individuals and investment that contribute to the growth of the economy,” read the statement. 

“The concept of domicile is outdated and incentivises individuals to keep income and gains offshore. The government is therefore modernising the tax system by ending the current rules for non-UK domiciled individuals… The government is introducing a new residence-based regime taking effect from April 2025. This is the latest modernisation of the non-dom regime, following the government’s 2017 reforms which abolished permanent non-dom status.” 

According to Government documents released alongside the Budget, transitional arrangements would be put in place for current non-doms. 

As reported by The Financial Times, “Those who do not qualify for the new regime will, in the 2025-26 financial year alone, pay tax on 50 per cent of their foreign income. The reduction applies only to income, not foreign gains.

“For current non-doms, capital assets will also be rebased to their levels on April 5, 2019, for sales that take place after April 6, 2025. This change means that when foreign assets are sold, affected individuals can elect to be taxed only on capital gains tax (CGT) since April 2019.”

The scrapping of the non-dom tax status is likely to be a ‘push factor’ from the UK.

The reform, which is claimed will raise £2.7 billion per year by 2028-29, in addition to the current £8.5 billion which non-doms pay in UK tax each year, has been slammed as a “flop” that will “help drive hard working people and investors out of the UK” by Nigel Green, the CEO and founder of deVere Group, one of the world’s largest independent financial advisory and asset management organisations.

“The scrapping of the non-dom tax status is likely to be a ‘push factor’ from the UK, depriving the country of considerable direct and indirect investment as those affected are likely to simply move to more attractive jurisdictions,” says Green.

 “In many ways, the Chancellor’s Spring Budget was lacklustre. It was a flop and could be a masterclass in the Law of Unintended Consequences as it could push more hard-working people and investors out of the UK.”

“The headlines will be that the non-dom tax regime has been ‘scrapped’,” counters Peter Daniel, Partner & Head of Private Wealth at leading firm Collyer Bristow. “In reality, it has been rebranded and simplified. The determining factor being years of tax residence, rather than the amorphous concept of domicile, will bring clarity. 

“While the period during which people will have income tax and CGT benefits will be much reduced, the position will be far more straightforward with no complex remittance rules. The changes will also encourage foreign funds to be brought to the UK, rather than incentivising the opposite, as the current system does. The biggest unknown is how the inheritance tax (IHT) position will be affected, on which the Government will ‘consult’. 

“For many foreigners moving to the UK, IHT will be far more important than income tax. The potential risk of exposing their worldwide assets to IHT if they are hit by a bus during a relatively short time living in the UK will be hugely concerning, particularly if their home countries have no similar tax, or one at much lower rates.”

The Government has consistently maintained that those with the broadest shoulders should contribute a bit more.

In this general election year, Jeremy Hunt’s non-dom U-turn mirrors that of opposition party Labour’s policy, with the Chancellor saying “The Government has consistently maintained that those with the broadest shoulders should contribute a bit more.”

Under the new system, an individual will be able to claim non-dom privileges for four years, down from 15 now.

“I have concluded that we can indeed introduce a system which is both fairer and remains competitive with other countries,” Hunt told parliament during his annual budget, adding that new arrivals would pay tax on foreign income and gains after four years of UK residency.

In an interview with Fortune, Mark Davies of ultra-high-net-worth tax advisory Mark Davies & Associates, said the reforms “most certainly will mean people will leave. It will actually mean people will not come in the first place as four years isn’t enough to settle with kids.

“It will appeal to people on secondment to work in the City of London but won’t appeal to billionaires.” 

According to GOV.UK, there were 68,800 non-doms in the tax year ending 2022. As reported by Fortune, “This population has almost halved since 2015, when then-Labour party leader Ed Miliband pledged to scrap the status. A Conservative-led government subsequently announced a measure taking effect from April 2017 to stop non-doms claiming the tax status on a permanent basis, while fees were introduced for longer-term residents.”

In previous years, the Conservative government had defended non-dom status, arguing it benefitted all to attract the wealthy to live in the UK and spend their money there. 

The policy dates back to 1799, when it was introduced to protect colonial investments. In recent years, notable non-doms have included former HSBC Holdings Plc Chief Executive Officer Stuart Gulliver, former Conservative Party Deputy Chairman Michael Ashcroft, and Akshata Murty, the wife of current British Prime Minister Rishi Sunak (who has since given up the status).