Increased non-dom tax revenue reached £12bn, prompting Labour's intervention

Increased non-dom tax revenue reached £12bn, prompting Labour's intervention

The United Kingdom's non-domicile (non-dom) tax regime has experienced a series of transformative changes, most notably due to the recent actions taken by the Labour government. As of April 6, 2025, the remittance basis, which previously allowed non-doms to be taxed only on foreign income and gains remitted to the UK, is no longer accessible to UK residents, transitioning towards a residence-based tax system[1].

**Key Changes:** - **Remittance Basis:** No longer available to UK residents. - **Taxation on Income and Gains:** Now taxed on an arising basis. - **Inheritance Tax (IHT):** Individuals who have been UK tax residents for 10 years will be subject to UK IHT on their worldwide estate, down from the previous 15-year rule[1]. - **Trusts:** Long-term UK resident settlors' trusts, including Excluded Property Trusts, will be exposed to IHT[1].

There is ongoing debate regarding potential revisions to some of these changes, particularly concerning IHT and potential transitional reliefs for long-standing non-doms[1].

The impact of these changes on the tax contributions of wealthy foreigners is significant. Non-doms, representing approximately 0.2% of the income tax paying population, contributed nearly £12.5 billion to HM Treasury in the 2023/24 tax year, through income tax, National Insurance Contributions, and Capital Gains Tax, with each individual paying an average of nearly £150,000 in direct personal taxes[2].

The removal of the non-dom regime's benefits poses a risk of losing this valuable source of revenue, as some non-doms may choose to leave the UK. This could result in increased tax burdens for other UK residents to compensate for the loss. A significant departure of non-doms could necessitate a 1.5p increase in the basic rate of income tax to recover the potential losses[2].

In place of the remittance basis, a new Qualifying Non-Resident (QNR) regime has been introduced, offering tax exemptions on foreign income and gains for the first four years of UK residence, but it is complex and its details are still evolving[3]. Critics argue that the current reform's biggest error is taxing UK investments of new arrivers, encouraging them to invest anywhere but in the UK.

The latest HMRC figures show that less than one per cent of wealthy foreigners have taken advantage of Business Investment Relief (BIR), a scheme aimed at encouraging investment in the UK[3]. Arun Advani, director of the Centre for the Analysis of Taxation, finds it shocking that less than one per cent of non-doms used the BIR.

The changes to the non-dom regime have occurred amidst a drop in the number of non-doms, ending a period of rapid growth, particularly in the wake of the pandemic[4]. If the tax changes drive the non-dom population away, the government will lose not only income tax, Capital Gains Tax, and National Insurance Contributions but also some of the receipts from additional taxes like VAT and UK corporation tax[5].

The non-dom status, a centuries-old status, was a subject of debate, with the then Chancellor Jeremy Hunt announcing in March 2024 that his government would abolish it if they won the next general election, but they retained other benefits for wealthy foreigners[6]. After the Labour's landslide in the summer, they confirmed they would plough ahead with a stricter interpretation of the crackdown, making non-doms' trusts and other foreign-held assets liable for inheritance tax[6].

[1] - https://www.gov.uk/government/publications/non-domiciled-tax-changes/non-domiciled-tax-changes [2] - https://www.ft.com/content/75d8e85d-5d39-4b2c-a76d-8a6f294034d6 [3] - https://www.ft.com/content/a413d817-d4b1-440c-a11b-c928cf82939f [4] - https://www.ft.com/content/4f0f8d0b-b607-425d-b4a8-4c67567c9443 [5] - https://www.ft.com/content/e8d56a1a-f6d6-4a1e-a22c-8e4568f9604a [6] - https://www.bbc.co.uk/news/business-58519496

1. The transition towards a residence-based tax system in the United Kingdom has led to an end of the remittance basis for UK residents, affecting the taxation on income and gains.
2. The recent changes in the non-domicile tax regime, such as the implementations of a residence-based tax system and inheritance tax on worldwide estate for individuals who have been UK tax residents for 10 years, have sparked discussions on potential revisions, especially in regards to inheritance tax and transitional reliefs for long-standing non-doms.
3. With the removal of non-dom regime's benefits, there is a concern that some non-doms may decide to leave the UK, which could potentially result in increased tax burdens for other UK residents, possibly necessitating a 1.5p increase in the basic rate of income tax to compensate for the loss.
4. The new Qualifying Non-Resident (QNR) regime, offering tax exemptions for the first four years of UK residence, may be complex and far from ideal for some non-doms, as its details are still evolving and critics argue that taxing UK investments for new arrivals discourages them from investing in the UK.

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