Wealthy UK residents allowed to protect their foreign income from UK tax is not purely a phenomenon of today’s globalized capitalism. The UK non-domicile scheme – which allows residents to declare another country as their domicile or permanent residence, and pay no UK tax on overseas income or gains unless they remit the money in the UK – dates back to 1799, when the government levied taxes to fight France. Two centuries later, it creates periodic controversies – such as with the revelation that the Chancellor of the Exchequer’s wife, Akshata Murty, was using the system (legally) – and public anger over a two-tier tax regime seen as favoring the wealthy. The time has come for comprehensive reforms to modernize an outdated system.
The main reason given for preserving the current regime is that it helps to attract competent business people to Britain, which provides a competitive advantage. Although data on total economic benefits is scarce, the Treasury estimates that ‘non-doms’ contribute nearly £8billion a year in UK income and capital gains tax. Abolish the current system, its supporters say, would deter others from coming and entice non-doms to leave – robbing the UK of their talents, spending and taxes.
Many countries have temporary resident tax schemes to entice entrepreneurs, but the UK system is poorly designed. Its historical origins mean that domicile is an uncodified common law concept, leaving it open to uncertainty and avoidance. Although the previously permanent non-dom status was capped at 15 years as of 2017, that’s far longer than most regimes elsewhere.
The economy benefits from the business and wealth that non-doms create in Britain, but the current system encourages them to keep the fruits of overseas assets outside the country, because as soon as they are paid into UK bank accounts, they will be taxed. Finding a way to tempt arrivals instead of bringing overseas earnings to the UK could deepen the pool of funding for investment. Such arrangements are also more attractive to those with family wealth or the oligarchs; start-up entrepreneurs often do not have significant income elsewhere.
Even sweeping reforms need not necessarily lead to mass departures of non-doms. Rule changes over the past 15 years, including the introduction of an annual fee of £30,000 to claim the tax benefits for people in the UK for at least seven years, and £60,000 over beyond 12 years, have not triggered a great exodus. The number of people claiming non-dom status has fallen since the 15-year cap was introduced in 2017 – 75,700 claimed it in 2020, down from 78,600 the previous year. But some banks that sent staff home after Brexit and claimants who passed the 15-year mark also played a role.
Spurred in part by fury over the Chancellor’s wife, the opposition Labor Party – which has previously called for the abolition of non-dom status altogether – is proposing to replace it with a new system. A similar result could be more easily achieved by reforming the current provisions. Non-dom status should be replaced by some form of temporary resident tax status, defined by law, for those coming for limited periods of time. It should be capped at, say, five to seven years. This could then allow for greater generosity towards genuine temporary residents – exempting them from tax on foreign income and gains, but encouraging them to bring them to Britain to spend or invest.
The result should be clearer and simpler rules designed to achieve the goal of attracting talented overseas professionals to spend time in the UK without penalizing them with complex taxes. It would help maintain a competitive edge – in a way that’s fit for 2022, not 1799.