Stay or go? UK’s non-doms prepare for scrapping of tax status

The wealthy non-domiciled residents of the UK are getting nervous. After years of cuts to their special tax privileges, people who live in Britain but do not have to be domiciled there for tax purposes now face the threat of this regime ending altogether.

The opposition Labour party is polling strongly in advance of the next general election and has pledged to scrap the system if elected.

“What I am seeing is that, all of a sudden, clients are asking questions — they’re coming to the realisation that the government has got to call an election no later than 14 months,” says David Lesperance, founder and principal of international tax advice firm Lesperance & Associates.

“With a potential Labour majority looming, wealthy ‘non-domiciliaries’ . . . are about to face the biggest challenge to their status since the 1790s,” he warns.

Many of his non-dom clients are “already packing parachutes”, he adds — looking at options to leave the UK.

Nearly 70,000 non-doms face decisions about what to do in the event of a Labour electoral victory. The choices they make could have wide repercussions for the UK’s tax revenue and international competitiveness. As well as super-rich business owners and heirs, non-doms also include City of London bankers, lawyers and consultants. Those living off unearned income are far outnumbered by non-doms who work, according to research based on tax records.

Labour’s plans

While the UK is hardly unique in the world, its prominence as a financial and cultural capital has made its tax regime well known among the international rich. However, with domestic critics repeatedly branding the non-dom status as unfair, successive governments have diluted the system over the past 15 years, with the Conservative government ending the ability to permanently claim non-dom status in 2017.

The system drew controversy once more last year after the revelation that the wife of Rishi Sunak, the prime minister (and former chancellor), had claimed the status. Akshata Murty subsequently announced she would pay UK taxes on all her income out of a “British sense of fairness”.

Now, the opposition Labour party has proposed abolishing the non-dom regime and using the tax raised to increase recruitment and training of NHS staff and spending on school breakfast clubs. The party has said it plans to replace the rules with a “clear, simple and modern system”.

Shadow chancellor Rachel Reeves has said Labour would look at countries including Canada, France and Japan to develop the new system and would consult on the details.

One person close to Labour told the Financial Times that any reformed system would “continue to attract top international talent . . . Genuine temporary residents would not pay tax on their overseas income and gains.”

Research by the University of Warwick and the London School of Economics, which analysed 21 years’ worth of non-doms’ tax returns up to 2018, concluded that scrapping the regime would bring in additional tax of £3.6bn a year.

The research modelled how non-doms reacted to the government rule changes that ended their ability to claim the tax perks on a permanent basis and concluded the mobility of wealthy people in response to tax rises “is lower than is traditionally believed”.

Others argue the research did not take account of what the very richest might do. They warn abolishing the remittance basis of tax that non-doms use could result in much less tax revenue.

“Those who do leave are more likely to be in this group of the 500 wealthiest [paying a £60,000 fee], as they generally already have homes in other jurisdictions and, of course, have the most to lose by staying,” says Rachel de Souza, private client partner at accountancy firm RSM.

These people would need to have overseas income of at least £133,333, or gains of at least £214,286, for the £60,000 charge to be worthwhile, she explains. Their greater wealth means the impact of them leaving would have a greater effect on tax receipts.

“I have clients who say, ‘What on earth is going on in the UK?’,” reports Miles Dean, head of international tax at Andersen, a tax advisory firm. “‘Why on earth would you not want rich people coming here and contributing to the economy?’”

He has “plenty” of clients looking at options to leave the UK as a result. He fears that, if a future Labour government were to do away with the current regime, other countries would ultimately benefit, to the UK’s detriment.

Dean adds: “You want the City of London to be vibrant and the UK to prosper. But, when many other countries have got [tax privileged] regimes, we seem to be shooting ourselves in the foot repeatedly.”

International context

While net migration to the UK hit record highs last year, some finance industry experts worry about the UK’s ability to attract the very well-off, particularly in the face of increased international competition for their wealth.

Several countries in the past couple of decades have sought to copy the UK’s non-dom system and introduced tax privileged systems for wealthy foreigners, including Portugal, Italy, Spain, Greece, Malta and Cyprus.

Advisers in and outside the UK report that Portugal’s system has been one of the most popular. Since 2009, the country has had in place a non-habitual resident regime designed to attract highly qualified workers and investment. This offers tax exemptions on some foreign source income and a flat rate of 10 per cent on pensions from a foreign source. It also caps the tax on certain professional income earned in Portugal to a rate of 20 per cent for a duration of 10 years. More than 74,000 people had benefited from the regime, as of the end of 2022, according to official data, with France and the UK having the highest number of applicants.

However, in October, the Portuguese government announced it would ditch the tax break from January 2024, saying the popularity of the scheme had pushed up house prices and priced out locals. Even though it has now called a snap election, the caretaker government has promised to keep to this abolition. Nevertheless, people who have registered for the regime by the end of this year will be able to receive its benefits for the promised 10-year period.

Bruno Andrade Alves, a tax partner at accounting firm PwC Portugal, said the development had “not been expected” and that the government had not yet provided evidence for the impact on house prices or released information about the overall level of taxes entrants had paid in Portugal.

The short timeframe given before the regime is scrapped may jeopardise the plans of some who had already started preparing a move for 2024, as it will be very hard to organise everything needed for a move to Portugal within two months, he says.

I have clients who say, ‘What on earth is going on in the UK?’

“The regime worked well and attracted a lot of people and investment,” Andrade Alves adds. “Other countries such as Spain, Italy and the UK have similar special tax regimes. Some of the people [who would have chosen Portugal] will think of other countries.”

Marco Cerrato, a partner at Maisto e Associati, a law firm based in Italy and the UK, says the scrapping of Portugal’s special tax regime “plays in favour for Italy and other countries”. Under Italy’s scheme, a new tax resident can make an annual tax payment of €100,000 to shelter their foreign earnings and gains from Italian tax for up to 15 years. The system came into force in 2017 and had been used by about 2,500 people by 2021, according to the latest statistics available.

Cerrato says he is seeing increased demand from UK-based non-doms interested in a move to Italy, because they are worried about the possibility of a Labour government. These include many private equity executives who, along with being non-doms, are concerned by the Labour party’s plans to end a tax break used by private equity executives to reduce taxes paid on their share of profits, known as carried interest.

But, even if the UK non-dom regime were to be abolished, Cerrato does not necessarily think it would lead to an exodus of people. There are many factors why people choose to relocate, with tax often acting as a “sweetener”, he explains.

“London is a unique place, a great place, the schools are great,” Cerrato adds. “I don’t think all these people would move all of a sudden. But people who don’t have children, or are not professionally active, or are going to receive a big amount of money for a liquidity event, they might move.”

Non-dom options

De Souza at RSM agrees that moving out of the UK to avoid the potential change in tax status “is quite a dramatic measure from a lifestyle perspective”. Some people might find that overall, that is the right decision for them. However, there are other options, including the legitimate setting up of offshore structures, such as trusts.

Non-doms who have not been resident in the UK for more than 15 years can set up trusts now and place their non-UK assets in these. It is important for these people to “establish those structures now, in the hope that the existing provisions will be grandfathered [kept in place if they were already in existence before the law changes]”, de Souza says.

Individuals who place their non-UK assets in trust before they are deemed domiciled have such assets ringfenced from inheritance tax indefinitely, even if they have decided to settle permanently and lost their foreign domicile status, a measure some advisers privately concede “is generous”.

Emma Chamberlain, a barrister who specialises in non-dom work and trusts, notes that the tax treatment of trusts for wealthy families remains unclear in the event of a new Labour government abolishing domicile, particularly in the area of inheritance tax (IHT).

She thinks people who have been UK resident for years would probably be willing to pay tax on their worldwide income or gains, including trusts, under a Labour government, but will be much more bothered about ensuring their trust assets remain protected from IHT.

“A lot of wealthy older former non-doms who have been here a long time care most about IHT, particularly if they have decided to settle here permanently,” she says. “If [a future government] were to change the IHT rules, that would have a significant impact.”

Other advisers say that some people are choosing to become non-UK tax resident by increasing the number of days they spend outside the UK. Depending on their circumstances — such as family ties and location of residences — this means they can still retain a home in the UK and spend a limited amount of time in the country.

“There’s lots of choices. You don’t have to go live on some rock in the middle of the ocean,” says tax adviser Lesperance. “And you can still come in for the Chelsea Flower Show or your deals.”

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment