Wealthy UK residents being allowed to shelter overseas earnings from British tax are not purely a phenomenon of today’s globalised capitalism. Britain’s non-domicile regime — which allows residents to declare another country as their domicile, or permanent home, and pay no UK tax on overseas income or gains unless they remit the money to the UK — dates back to 1799, when the government was levying taxes to fight France. Two centuries later, it creates periodic controversies — as with the revelation that the chancellor of the exchequer’s wife, Akshata Murty, was (legally) using the system — and public anger over a two-tier tax regime perceived to favour the rich. The time has come for comprehensive reforms to modernise an outdated system.
The main reason cited for preserving the current scheme is that it helps to attract capable business people to Britain, providing a competitive advantage. Though data on the total economic benefits are scarce, the Treasury reckons “non-doms” contribute almost £8bn a year in UK income and capital gains taxes. Abolishing today’s system, say its proponents, would deter others from coming and prompt non-doms to leave — depriving the UK of their talents, spending and taxes.
Many countries have temporary resident tax schemes to woo entrepreneurs, but the UK system is poorly designed. Its historical origins mean that domicile is an uncodified, common-law concept — leaving it open to uncertainty and avoidance. Though non-dom status, previously permanent, was capped at 15 years from 2017, this is far longer than most schemes elsewhere.
The economy does benefit from the business and wealth that non-doms create in Britain, but today’s system incentivises them to keep the fruits of overseas assets outside the country — since as soon as these are paid into UK bank accounts, they will be taxed. Finding a way to tempt arrivals instead to bring overseas gains into the UK could deepen the funding pool for investment. Such arrangements are also most attractive to those with family wealth, or oligarchs; early-stage entrepreneurs often do not have sizeable income elsewhere.
Even broad reforms need not lead to mass departures of non-doms. Rule changes in the past 15 years, including introducing a £30,000 annual fee for claiming the tax perks for those in the UK for at least seven years, and £60,000 beyond 12 years, did not spark a big exodus. Numbers claiming non-dom status have declined since the 15-year cap was introduced in 2017 — 75,700 were claiming it by 2020, down from 78,600 the year before. But some banks sending staff home after Brexit, and claimants passing the 15-year mark, were also a factor.
Spurred on in part by the furore over the chancellor’s wife, the opposition Labour party — which has previously called for non-dom status to be scrapped altogether — is proposing to replace it with a new system. A similar result could be achieved more easily by reforming the current arrangements. Non-dom status should be replaced by a form of temporary resident tax status, defined by statute, for those coming for limited periods. It should be capped at, say, five to seven years. This might then allow greater generosity to genuine temporary residents — exempting them from tax on foreign income and gains, but encouraging them to bring these into Britain to spend or invest.
The result should be clearer, simpler rules designed to achieve the goal of attracting talented foreign professionals to spend time in the UK without penalising them with complex taxes. That would help to maintain a competitive advantage — in a manner fit for 2022, not 1799.