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U.K. is overhauling its preferential tax treatment for wealthy foreigners

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The UK is overhauling its system of preferential tax treatment for wealthy foreigners, creating revenue for the government to spend on British voters at the expense of agitating some of the nation’s richest residents.

Chancellor of the Exchequer Jeremy Hunt said in his Budget speech Wednesday that the “non-domicile” status would be abolished after more than two centuries, with a new tax system based on where people live taking effect from April 2025. 

The changes include: 

  • Everyone will pay UK tax on their foreign income and gains after living in the country for four years — scrapping the “remittance basis” rule that only taxes money brought into the UK;
  • New arrivals will benefit from 100% UK tax relief on foreign income and gains for their first four years;
  • A temporary 50% cut in the personal foreign income subject to tax in 2025-26 for non-doms who will lose access to the remittance basis;
  • Inheritance tax will also move to a residence-based regime, with the details yet to be confirmed.

“After looking at the issue over many months, I have concluded that we can indeed introduce a system which is both fairer and remains competitive with other countries,” Hunt said in the House of Commons. He said the grace period for new arrivals was “a more generous regime than at present and one of the most attractive offers in Europe.”

The changes are intended to raise £2.7 billion ($3.4 billion) in tax per year by 2028-29, in addition to the £8.5 billion that non-doms currently pay in various UK taxes each year. This has given Hunt some extra headroom to cut national insurance, a form of payroll tax, while still meeting his budget targets ahead of a general election that must be called by next January. Labour has also pledged to overhaul the non-dom rules. 

The latest reforms “have only added urgency” to wealthy residents looking to leave the UK, according to David Lesperance, a Poland-based tax and immigration adviser for the ultra-rich. “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!”

Current Regime

Mark Davies, a tax adviser for the super-wealthy, said the reforms “most certainly will mean people will leave. It will actually mean people will not come in the first place as four years isn’t enough to settle with kids.”

“It will appeal to people on secondment to work in the City of London but won’t appeal to billionaires,” he added. 

Non-domiciled residents — ranging from multibillionaires to middle-ranking bankers — don’t pay UK taxes on their overseas earnings for as long as 15 years under the current program, introduced by the ruling Conservative Party.

More than one in five bankers earning more than £125,000 claimed non-dom status at some point, according to 2022 research from the London School of Economics and the University of Warwick. The oil and car industries also have a high percentages of non-dom claimants. 

There were 68,800 non-doms in the tax year ending 2022. This population has almost halved since 2015, when then-Labour party leader Ed Miliband pledged to scrap the status. A Conservative-led government subsequently announced a measure taking effect from April 2017 to stop non-doms claiming the tax status on a permanent basis, while fees were introduced for longer-term residents.Play Video

Colonial History

The UK’s non-dom regime dates back to 1799, when it was introduced to protect colonial investments. In recent years, notable non-doms have included former HSBC Holdings Plc Chief Executive Officer Stuart Gulliver and onetime Conservative Party Deputy Chairman Michael Ashcroft.

Prime Minister Rishi Sunak’s wife, Akshata Murty, was also revealed in 2022 to benefit from the status. After a media storm, Murty said she would pay UK taxes on her global earnings, partly derived from Indian software giant Infosys Ltd.

Other international hubs are competing for wealthy, mobile residents. Italy’s tax breaks include a €100,000 ($108,020) flat levy on income earned abroad, while low-tax regimes have helped to attract financial firms to Gulf cities including Dubai and Abu Dhabi. 

“We could see some wealthy individuals shun the UK as a home altogether and take their money with them,” said Sean Cockburn, director at accountancy firm Mazars, of the latest changes. “It’s a careful balancing act that must be struck. Making the UK an attractive place for the world’s wealthy to reside, spend money, and do business while being taxed fairly.”

Chris Hayward, policy chairman of the City of London Corporation that governs the capital’s financial district, said it was “appropriate” to modernize the non-dom rules. “We need to ensure that the changes are positive and proportionate, sending the right signal that the UK is a great place to live and invest.”

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