Jeremy Hunt has announced the government will scrap the existing non-dom regime in the spring budget
Speaking in the House of Commons on Wednesday, Hunt said it will be replaced by a ‘simpler, fairer, residency-based scheme’.
Under the new rules, arrivals will have access to a ‘more generous scheme for their first four years of tax residency’ before ‘paying tax in the same way as everyone else’. There is also transitional relief for non-doms already residing in the UK. The government anticipates this will generate £2.7 billion a year by 2028/29 ‘without deterring investment’.
[See also: Non-doms and the general election: when should HNWs act?]
It comes days after reports first suggested the conservatives were considering the measure as a means to generate revenue to fund crowd-pleasing cuts to national insurance.
The announcement marks a dramatic shift in policy for the Conservatives, who have been long-standing supporters of the non-dom status. Akshata Murty, the wife of prime minister Rishi Sunak, previously benefited from the tax regime.
The decision to abolish the non-dom regime in the spring budget will put the squeeze on Sir Keir Starmer ahead of the general election. It has been a key policy for Labour and shadow chancellor Rachel Reeves has already announced the money it raises will be used to pay for key priorities like improving NHS funding.
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Tax advisers and lawyers are divided over the ‘surprising’ move. Speaking to Spear’s, some applauded the decision to simplify what many regard as an overly complex system. Yet others warned the proposed changes will make the UK ‘uncompetitive’ and will drive an exodus of UHNWs.
The existing non-dom regime
Non-doms currently benefit from the ‘remittance basis’, which means no tax is payable on foreign income as long as it is not brought into the UK. The arrangement can include an annual charge, depending on how long a non-dom has been in the UK, of £30,000 or £60,000.
HMRC’s rules have already become less generous for non-doms in the past 15 years. Changes in 2017 meant those living in the UK for 15 of the past 20 years are now treated as ‘deemed domiciled’, at which point they have to pay UK tax on their global income, as other UK-domiciled taxpayers do.
[See also: Is this how to save the non-dom regime?]
Unsurprisingly, the numbers of non-doms have begun to fall. In 2008, 137,000 UK taxpayers were using the non-dom rules. The figure fell to less than 80,000 in 2018. Despite this, the tax take from non-doms and deemed domiciles hit a record level of £12.4 billion in 2022.
Tax advisers question ‘surprising’ scrapping of non-dom regime in spring budget
Sophie Dworetzsky, a Spear’s Top Recommended tax lawyer and partner at Charles Russell Speechlys, notes the announcement marks a change of direction for the Conservatives, who have previously criticised Labour’s plans to scale back the regime.
‘While Hunt 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,’ she observes.
[See also: The UHNW non-doms leaving the UK to escape a Labour government]
‘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 four 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.’
Meanwhile tax adviser David Lesperance notes a ‘move towards a bright line residence test is logical’ given the complexity and uncertainty of establishing domiciled status under the current system. ‘It would allow certainty on the part of taxpayers and make HMRCs enforcement efforts more focused and effective,’ he adds.
However, he warns the move will ‘only add urgency’ to non-doms who plan to leave the UK. He continues: ‘They already knew that a future Labour government was either going to abolish or significantly restrict the remittance basis. Now they know that rather than saving them, the Tories are also willing to throw them under the bus!’
Rebecca Durrant, head of private clients at Crowe UK agrees there could be a risk that UHNWs will choose to leave the UK, saying: ‘It will be interesting to see what impact the new regime will have on these individuals’ desire to remain in the UK. It is often underestimated how much non UK doms contribute to the UK economy, so if the new rules drive them to other more tax attractive jurisdictions this may not have the impact the chancellor desires.’
Meanwhile Anthony Whatling, managing Director at Alvarez & Marsal Tax, noted Hunt’s proposal could be viewed as ‘more restrictive’ than Labour’s proposed policy. ‘The new regime, surprisingly, only applies to an individual’s first four years in the UK, making it arguably more restrictive than what the Labour Party might have planned,’ he explains.
‘While this new regime might seem more appealing than those requiring lump-sum payments, its four-year duration falls short when compared to the reliefs offered in Italy, Spain, France, and other major jurisdictions. Whether it will truly attract high net worth individuals to the UK hinges on whether the current government remains in power when the measure is set to take effect in April 2025, which seems unlikely.
‘On the other hand, the transitional reliefs for non-doms already residing in the UK appear to be quite generous. The current rules, which can impose a potential tax rate of up to 45 per cent, often deter funds from flowing into the UK. The new opportunity to bring in historical offshore income at a flat rate of 12 per cent is likely to be highly attractive, potentially providing significant benefits to UK plc.’
Basil Dixon, partner at Payne Hicks Beach, is optimistic: ‘The Chancellor has announced sweeping changes to non-dom taxation but there is no need to panic and the new regime presents attractive opportunities for the well advised client. After a week of intense speculation the Chancellor has put the final nail in the coffin of the tax regime for non-domiciled residents, which has been fading for the last 20 years. He is replacing it with a generous regime for new arrivers to the UK, available for the first 4 years of their residence, where their foreign income and gains will be completely free of UK tax. Unlike similar regimes, eg. the one in Italy, there will be no charge to access this treatment.’
