Tax reforms may push wealthy non-doms to exit UK: report

The government expects the reform to generate an additional £12 billion in tax revenue

• Pramod Thomas
• 01 November, 2024

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By: Pramod Thomas

THE government’s decision to abolish the “non-dom” tax status is expected to prompt more wealthy individuals to leave the country than previously anticipated, according to recent projections from the Office for Budget Responsibility (OBR).

The non-dom scheme, which has allowed British residents who are classified as “non-domiciled” to avoid paying UK tax on their overseas income, will end from April next year.

Instead, a residency-based tax system will be implemented, meaning that individuals will be taxed on all income and capital gains worldwide if they reside in the UK.

The OBR now predicts that about 25 per cent of non-doms who have offshore trusts may choose to leave the UK rather than face increased taxes under the new regime, a jump from its earlier estimate of 20 per cent, the Times reported.

Among non-doms without such trusts, 12 per cent are now estimated to leave, up from 10 per cent.

The government expects the reform to generate an additional £12 billion in tax revenue over the next five years, but the OBR has cautioned that this figure involves considerable uncertainty, as it depends significantly on the number of non-doms who decide to remain in the UK despite the higher tax obligations.

The chancellor has introduced some relief measures within the new framework, which could help ease the impact of these changes and potentially prevent a mass exodus.

For instance, one provision allows former non-doms to pay a lower tax rate of 12-15 per cent on income repatriated to the UK for spending or investment purposes. This reduced rate will now apply for up to three years, extending from the previous two-year limit.

Another adjustment pertains to inheritance tax, where former non-doms will now face this tax obligation for three to ten years after leaving the UK, depending on the duration of their residency, rather than the originally proposed ten years.

Meanwhile, some tax advisers suggest that these measures may not be enough to keep Britain’s wealthiest residents from moving to countries with more favourable tax environments, such as the US, Switzerland, or the UAE.

Matthew Sperry, a partner at the law firm Katten Muchin Rosenman, believes these jurisdictions will increasingly attract high-net-worth individuals who are reassessing their long-term plans in the UK.

Many non-doms, who collectively pay around £6bn a year in income tax, national insurance, and capital gains tax, are believed to contribute significantly to the economy, though their foreign income has been shielded from UK tax.

Cautioning against an overly strict approach, the Institute for Fiscal Studies has previously advised the government to handle changes to non-dom policies carefully, given the international mobility of this group.

According to the OBR’s estimates, the new tax framework could bring in £4.17bn by 2026-27, increasing to £5.9bn in 2027-28. However, by 2028-29, revenue from these changes is expected to drop to £2.55bn.

Alex Henderson, a tax partner at PwC, pointed out that the 40 per cent tax on assets with no UK connection might be a significant concern for the wealthiest non-doms, influencing their decision on how long to remain in the country.

Edward Hayes of Burges Salmon said that the new regime, with its adjustments, is seen as “slightly more favourable” than initial Tory proposals.