The United Kingdom has announced that it will scrap a 225-year-old rule that has allowed many of its richest residents to pay hardly any tax on their vast foreign earnings — a benefit enjoyed at one point by the prime minister’s wife.
The axing of the non-domiciled tax regime represents an about-face for Britain’s Conservative government, which had previously rejected calls to abolish the so-called “non-dom” status, citing the risk it posed to the country’s ability to attract globally mobile investors and wealthy foreigners with big spending power.
“Those with the broadest shoulders should pay their fair share,” UK finance minister Jeremy Hunt told parliament Wednesday. “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.”
There were an estimated 68,800 non-doms in the UK in 2022, according to HM Revenue & Customs, the UK’s tax collecting authority. Non-doms are people living in the UK but who claim to have a permanent residence in another country.
The non-dom status means they can choose not to pay taxes on income and capital gains earned abroad for up to 15 years after arriving in Britain as long as they don’t transfer any of that money into the country.
Many of them are extremely rich. In 2018, more than 40% of UK residents with income of £5 million ($6.4 million) a year claimed non-dom status, according to research from the London School of Economics and Political Science, and the University of Warwick.
Under Hunt’s new rules, people moving to the UK will only be exempt from tax on foreign earnings for the first four years they are resident. The changes, which will come into effect from April 2025, will form part of a “modern, simpler, and fairer residency-based system,” Hunt said, and are expected to generate £2.7 billion ($3.4 billion) a year for the government by 2029.
‘Colonial concept’
The non-dom regime is an “archaic colonial concept,” which determines a person’s tax status based on their “intended” place of residence, said Arun Advani, an economics professor at the University of Warwick. According to the London School of Economics, tax breaks for non-doms date back to 1799 when the government wanted to protect the aristocracy from paying tax on their properties in British colonies.
In contrast, a residency-based system calculates the tax owed by a person based on how much time they spend in the country, which is the approach used by most other nations, Advani said.
The changes were unveiled in Hunt’s budget announcement Wednesday, which included billions in tax cuts for workers ahead of the first general election since 2019. He also slapped higher taxes on business- and first-class airfares.
The opposition Labour Party had previously said it would abolish the non-dom regime if it came to power, and spend the money raised on the National Health Service.
Political pressure to abolish the system has built since 2022, when it transpired that Akshata Murty, the wife of Prime Minister Rishi Sunak, was registered as a non-dom and claiming tax exemptions on earnings tied to her father’s software empire in India.
Murty has since renounced those advantages, citing the “British sense of fairness” and the “distraction” her tax status posed to her husband, who was serving as the UK’s finance minister at the time. But in November 2022 Hunt defended the “non-dom” status.
“I’m not going to do anything that’s going to damage the long-term attractiveness of the UK, even though it gives easy shots to opposition parties,” he told the BBC at the time, according to several reports in UK media.
A spokesperson for the prime minister’s office said Wednesday that Sunak had not been involved in the development of the new “non-dom” tax rules “to mitigate against potential or perceived conflicts of interest.”
“The prime minister was recused from all policy development and was only sighted on the policy once final decisions had been taken,” the spokesperson added.
— CutC by cnn.com
