Eat the rich: an explainer on non-doms and upcoming tax changes
Get enough Harvard Business School alums together and one of them will surely bring up taxes. The latest lament I heard yesterday is the change in “non-dom” status in the UK. While its name might suggest that it refers to not wearing a condom, this is actually a tax system that exempts some people from paying tax on their foreign income. This is primarily a tax break for the rich, and both major political parties want to end it.
Even if someone for all intents and purposes lives in the UK, an individual can claim to be “non-domiciled” for tax purposes if they were born abroad or have a foreign father and maintain ties to that country[i], or have set up a permanent residence elsewhere. Currently they can do this even if they’ve been in the UK for up to 15 of the last 20 years[ii]. So long as they do not repatriate these funds to the UK, they can remain untaxed.
~79,000 people in the UK claim non-dom status, or 0.2% of all tax-payers in 2022. The BBC quoted a study from 2018 that 30% of people earning more than £5 million claimed non-dom status, versus 0.3% for people earning less than £100,000. The median salary in the UK that year was ~£29,000[iii]. One in ten adults in Kensington, Westminster and the City of London have been a non-dom at some point in time. Our Prime Minister’s wife was even a non-dom, legally claiming tax relief on millions of pounds of foreign income in India.
The current government announced that they will end this policy. The major change is that non-doms’ foreign income will be taxed after four years of residency in the UK. The thinking is to raise another £2.7 billion per year by 2028/29, on top of £8.5 billion tax already paid by non-doms. Yet that estimate relies on those non-doms continuing to live in the UK.
Unsurprisingly, the person who brought this up is considering leaving London once the rules come into effect. He told us that this would increase his effective real estate tax rate to 80%, raising a few disbelieving eyebrows. A brave soul queried this statistic, and he explained that not only were British taxes higher, the deductions for expenses on property are less generous than his domicile abroad.
There is a risk that some rich internationals do leave the UK with this change in tax, taking with them the potential for local investment and job creation. It may also be avoidable with the right corporate tax structures. Yet it’s also possible that those who genuinely want to live in the UK might invest more here, if they are taxed on British investments the same way they are on foreign ones. Either way, it seems like a fairer outcome that this small group will now have their foreign income taxed the same way as everyone else.
[i] Why this policy, in 2024, discriminates between men and women parents is a mystery.
[ii] They pay a nominal fee if they have been here for 7 out of 9 (£30,000) or 12 out of 14 (£60,000)