According to academic research conducted by the London School of Economics and Warwick University, abolition of the so-called ‘non-dom’ status could bring in an additional £3.6bn of tax revenue each year.
The non-domiciled status entitles foreign nationals that are residents in the UK to declare permanent residence overseas, allowing them to avoid paying UK tax on overseas income and capital gains for up to 15 years. Foreign assets are also exempted from UK inheritance tax. The tax exemptions are conditional on no funds being remitted back into the UK.
According to HM Revenues & Customs, there were 68,300 non-doms recorded in the tax year ending in 2021. These non-doms accounted for £7.6bn in personal taxes and invested another £6bn through various government schemes to take advantage of other investment tax incentives.
Under Labour’s proposals, the non-dom system would be abolished to raise additional government revenue, and replaced with a ‘clear, simple and modern system’ that would still allow for some tax exemptions for short-term residents. In 2017, the previous government under Theresa May had already reformed the non-dom rules, replacing the indefinite exemption with a 15-year period.
The current government Treasury has decided against abolishing the system entirely, arguing that doing so would pose a risk to the UK’s competitiveness and that it might result in lower tax revenues if many previously non-domiciled residents decided to leave the UK. This view has largely been concurred by several wealth advisory firms to non-dom residents.
In contrast, the academic research conducted looked at 21 years of non-dom tax returns to obtain the estimate of £3.6bn in additional income, and further concluded that the 2017 reforms did not have a major impact on the mobility of non-dom residents, which was ‘lower than is traditionally believed’. The academics cited the reason being that non-dom residents with deeper involvement in the British economy were far more likely to absorb the cost of any tax reforms; the majority of those leaving were residents that did not already have significant ties, and incidentally also paid less in income tax. For this reason, the study has refuted the suggestion by wealth advisories that there would be a mass exodus in response to any further reforms.
Public sentiment remains split on the future of reform. At present, proponents of the scheme mostly consist of wealth advisories, and those within the current government who wish to attract high earners to the UK. However, with the recent disclosure of Rishi Sunak’s wife Akshata Murty having non-dom status, public scrutiny has intensified significantly, leading her to subsequently announce that she would start paying UK taxes out of a ‘British sense of fairness’.