The announcement made by the Chancellor in the Budget of the changes to the Non-Dom rules are likely to have Labour Party front benchers scratching their heads, as for so long this has been a mainstay of their agenda.
Commenting on the adoption of those plans by the Conservative Govt, Rachael Griffin, tax and financial planning expert at Quilter said:
“In a bold move Chancellor Jeremy Hunt has announced the abolition of non-domiciled status. This decision diverges from Tory fiscal policies, and not only aligns closely with Labour’s big-ticket proposals but also marks a big shift in the UK’s approach to taxation and residency. Whether this is policy rooted in the Tory’s true desire to tackle this part of the tax system or is just an attempt to one up Labour ahead of the upcoming election is yet to be seen.
Non-domiciled status, or ‘non-dom’ as it is known, has long been a subject of contention in the UK. It allows individuals residing in the UK but considering their permanent home to be abroad to enjoy substantial tax exemptions, particularly on foreign investments. This status, while beneficial to people like foreign students and workers, has predominantly served the wealthiest, providing them with a lucrative loophole to avoid paying UK tax on their global incomes.
People who use the remittance basis of tax, i.e. only pay UK tax on the income or gains that are brought to the UK, typically are well advised and therefore with the help of their adviser will be able to find creative ways to mitigate their UK tax liabilities regardless of the change in rules.
Economically, how significant this change is will depend on how it impacts the behaviour of its intended targets. While the immediate effect is expected to be a substantial increase in tax revenue—estimated at around £3.8 billion—there are concerns about the long-term impact on foreign investment and the attractiveness of the UK as a global financial hub. This figure is also only a best guess and could be much lower in reality. The change in rules could discourage high-net-worth individuals from living or investing in the UK, potentially leading to a drain of talent and capital. However, this perspective assumes a scenario where tax incentives are the sole reason for their residence in the UK, overlooking other factors such as political stability and legal system.
However, similar reforms introduced in 2017 did lead to a modest number of people leaving the UK, but the aftermath was far from the mass departure predicted by some. This resilience suggests that while the reform may indeed prompt a percentage of non-doms to relocate, the overall impact on the UK’s tax base may be less dramatic than feared.”
Nicholas Yassukovich, UK Financial Services Tax Partner at EY, adds:
“The non-domicile tax status has always been an important factor in attracting senior international talent to the UK – particularly in the banking and asset management sectors. The Chancellor’s decision to simplify and reform the non-domicile tax regime – rather than abolish it – is a sensible one. While the shortening of the time period to four years may make the UK less attractive when compared to more generous regimes such as those in Western Europe, the abolition of the remittance basis will be welcomed by some many foreign nationals who come to work in the City of London and currently have to keep earnings related to overseas business travel outside the UK.
“However, the wealth management and offshore banking service providers currently supporting the non-domicile community will undoubtedly be impacted negatively by this change, and will need to find new ways to maintain profitability by adding to their core offerings.”
Sharing his reaction to the Non-Dom changes, Andrew Parkes, Andersen LLP said: “The abolition of the non-dom regime surprised no-one.
“Its replacement, taxing new residents only on their UK income and gains for four years could be very valuable for short term visitors, however it will not tempt people to put down roots or make long term investments in the UK.
“The new regime will see the UK lose out to its competitors for anyone who is not a short term visitor. Spain, Italy and Greece all have regimes that last longer, overall are more generous and they have better weather.”
Gianpaolo Mantini, Chartered Financial Planner at Saltus commented that while the Non-Dom regime was abolished there is time to find a loophole – “This is a useful first step and removes some of Labour’s options whilst tackling a political weak spot for the Tories. Whether this will actually generate significant additional income for the Treasury is highly debateable. It provides a window for those to whom it applies to restructure their assets to mitigate these measures in a timely manner.”
Caroline Miller, Partner & Head of Private Client at Wedlake Bell comments on the impact of non-domicile tax reform:
“Today’s announcement on the non-dom tax regime was not unexpected following rumours about how the Chancellor would fund his tax cuts but time will tell whether it is successful in the balancing act between raising revenue and encouraging talent and investment into the UK.
“The move away from the remittance basis of taxation, to a four-year exemption regime is a far more straightforward approach and should encourage non-dom talent and investment into the UK for that period, but whether it will encourage them to stay for longer periods will remain to be seen.
“A lot will depend on the corresponding inheritance tax regime for non-doms, which was not included in today’s speech. It is more likely that the policy on inheritance tax for non-doms will shape the extent to which non-doms stay in the UK longer term, as having their worldwide estates subject to UK inheritance tax at 40%, potentially after four years, would not be attractive, particularly when other countries have a more competitive non-dom system in that respect.
“The announcement has a political sting and, as well as potentially raising revenue for the government, steals what Labour were previously hoping would be one of their election trump cards. It will be interesting to see how Labour now reshape their own non-dom policy.
“Of course, if Labour are successful on poll day and given that the Conservatives non-dom reforms will not take effect until April 2025, it is entirely possible that these newly announced changes do not in fact get implemented in their current form.
“With the Conservatives now favouring less generous non-dom tax benefits, and Labour already well-known to favour at least the same approach, it is clear that non-doms in the UK need to take advice on their tax planning as a result, albeit keeping a close eye on Labour’s reaction to the policy.”
Andrew Dixon, Head of Wealth Planning, SG Kleinwort Hambros comments on non-domiciled private banking clients remaining tax-efficient after the Spring Budget:
“Based on conversations with our clients, we’ve noticed that they are trying to understand what the budget means for them while trying to remain alert for potential changes which could be implemented after the next election.
We’ve observed the following:
- UHNW individuals tend to spend quite a lot of their time outside the UK so there is a possibility some will decide to leave the UK to avoid the new rules. Essentially, many choose to base their residency in the UK because of the current non-dom rules, but their lifestyle is such that they can quickly establish residency elsewhere.
- Since Labour’s pledge to abolish the non-dom status, non-dom individuals have been considering their options. There has been a marked increase in interest in the Italian lump sum regime driven largely by perceived instability of non-dom regime and Portugal abolishing the non-habitual residents regime. This announcement has effectively accelerated their decision making. If I were to make a prediction, I’d expect an uptick in migration from UK to Italy.
- For new arrivals, I think the simplicity of the new regime will be attractive compared to the status quo. However, I’d expect a much more transient population of non-doms than previously. Equally, for affluent and wealthy already in the UK who have children and/or family roots and who claim the remittance basis during the years it is free again, they should be less impacted.
- Inheritance tax based on residency will become interesting for lots of UK nationals who have relocated or are thinking about doing so. Under the current rules, it is very difficult for UK nationals to remove themselves from the scope of UK Inheritance Tax.
There are a lot of unknowns at the moment. There is a question whether business owners or high earning professionals in financial services and private equity will leave the country. On the other hand, the proposed regime might still be suited for some to move or remain in the UK, however, we’d probably see this happen for shorter periods than previously.”
Damian Bloom, Partner & Head of Private Client at Taylor Wessing, comments:
“Today’s announcements on changes to the non-dom regime follow months of media and political commentary on the additional tax that would be raised by ‘scrapping’ the existing regime, as Labour has promised to do, and are no surprise given the widespread rumours over the last few days.
“Recognition of the importance of continuing to have tax rules that encourage talented, entrepreneurial individuals to come to, and invest in, the UK is very welcome, as is a move away from domicile (a subjective and uncertain concept) as a connecting factor for UK tax, although a regime lasting just four years is less generous than comparative regimes in other countries.
“A fundamental problem with the existing non-dom regime is that it actively discourages those who benefit from it from bringing funds to the UK to spend or invest – the proposal to allow non-doms who are already in the UK to bring foreign assets and funds to the UK during a transitional period without suffering further tax, as well allowing individuals who move to the UK to do so has the potential to provide a much-needed boost to the economy.”
Adam Craggs, Partner, Tax Disputes, RPC comments:
“Scrapping the non-dom tax status is a major step-change in the UK’s tax regime and will be likely to lead to an outflow from the UK of much needed investment as those affected relocate to other more attractive locations.
While there are reasonable arguments on both sides of the non-dom debate, there can be no denying that such a change will have significant consequences for a large number of taxpayers. Statistics provided by HMRC in 2023 indicated that there were around 68,000 individuals claiming non-dom status in the UK in the tax year ending 2022 with tax liabilities of around £8.5b – not an insignificant sum.
Taxpayers affected by the Chancellor’s announcement will want to carefully consider what the changes mean for them, and will no doubt take appropriate steps to protect their position.”
Sophie Dworetzsky, Partner at law firm Charles Russell Speechlys said:
“Hunt scrapping the non dom tax regime today is somewhat surprising, given he has previously criticised Labour’s plan to scale-back the regime.
Whilst he has promised an alternative system that is fairer and competitive, an absolutely crucial aspect of any changes is to ensure that they are clear, bring stability and create an attractive regime for wealth creators considering a move to the UK.
The details of the new proposed regime are yet to be clear, but reducing the time period for which there are tax advantages for new arrivals to 4 years seems uncompetitive.
On the upside it is good news that it seems the new rules will encourage inward investment of offshore income and gains which currently cannot be easily and tax efficiently invested onshore.
A key question is how transitional arrangements will work”.
Judith Millar, Partner at BDB Pitmans, comments on changes to the non-domicile tax regime:
“Having confirmed that he had asked the Treasury to look at the financial impact of abolishing non-dom tax status in November 2022 the Chancellor announced today that it would be scrapped in favour of a different regime based on tax residency.
“He was at pains to emphasise the need to protect the attractiveness of the UK to foreigners but it is difficult to see how the UK will now fare when compared to, say, Italy if the benefits of the new UK system are to be available only for the first 4 years following arrival in the UK.
“Whilst we expected some modification to the non-dom rules on the basis of recent press reports, the changes that were announced in the Budget speech appear to go much further and will be of concern to anyone considering a move to the UK.”
Commenting on the Non-Dom change, GSB Wealth Partner, Mauro De Santis Bo said:
“The abolishment of the non-domicile status will directly impact some of GSB’s clients, as we work with international families moving around the globe. Some of our clients are UK non-domicile and are currently living in the UK.
We personally have some non-doms living in the UK who will likely reconsider whether to remain residents after the recent changes. Our job is to explain the changes in the recent budget, how these will impact their current situation, and the options available.
Wealthy non-doms who have the right level of advice will most likely find different ways to mitigate the impact of the new residency-based system and remain UK residents, but some families will prefer to leave the country and seek a new home that offers better tax treatment.
It will be interesting to see how this new residency system will play with the current rules for Inheritance Tax. If no further clarity is given, this change could potentially lead to some inheritance tax headaches for those non-doms (which will now fall under the new ‘modern, simple and fairer residency-based system’) living in the UK.”
Commenting on today’s Budget measure regarding non-dom tax rules, James Ward, head of Private Client at Kingsley Napley LLP, says:
“Today’s budget saw Jeremy Hunt steal Labour’s thunder with a move on wealthy non-doms by reducing the number of years they can spend in the UK before paying tax on their worldwide assets from 15 years to 4 years. He also is looking to attack offshore trusts and the protection they provide against arising income and capital gains tax. While it is understandable to make long-term UK residents pay tax on their worldwide assets, 4 years is hardly anytime at all, especially as other countries still offer far more generous schemes. So do not be at all surprised if we see even more non-doms leaving the UK and fewer wealthy individuals choosing the UK as a destination of choice.”
