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The UK government’s new regime to attract wealthy foreigners is too short-term and risks turning London into “a bigger version of the Bahamas”, non-doms and their advisers have warned.
Chancellor Rachel Reeves confirmed in her Budget last week the abolition of the non-dom regime, which allows UK tax residents whose permanent home or “domicile” is overseas to avoid paying British tax on their foreign income or capital gains for 15 years.
It will be replaced from April 6 2025 by a four-year residence-based scheme, which Reeves said would provide “internationally competitive arrangements for people coming to the UK on a temporary basis”.
Under the scheme, new arrivals to the UK will get 100 per cent relief on foreign income and capital gains for their first four years of tax residence, provided they have not been a UK tax resident in any of the 10 consecutive years before their arrival.
But non-doms and their advisers warned the new scheme is too short-term to attract people who want to make a home in the UK, educate children or build a business there, suggesting it may attract transient individuals just looking for a tax holiday.
“A four-year regime will turn the UK into a bigger version of the Bahamas without any meaningful contribution to the exchequer,” said Christopher Groves, a partner in the private client and tax team at law firm Withers in London, referring to the Caribbean islands that are a popular tax haven because of the absence of corporate and personal income tax and capital gains tax.
Groves suggested that under the UK’s new regime, “people will come to sell their business, reorganise their affairs and disappear again”.
Other countries have put in place tax breaks as they compete to entice high earners.
For example in Italy, a newly arrived resident — or an Italian who has lived abroad for at least nine years — can pay a flat tax of €100,000 a year on any foreign income and assets for up to 15 years, and be fully exempt from inheritance tax on foreign assets during that period. The annual levy is doubling to €200,000 from next year. France has a special expat tax regime, akin to the UK’s non-dom regime, which provides tax exemptions for eight years.
The UK’s new residence-based scheme “heralds a completely new approach to attracting wealth creators coming to the UK”, said Ashley Crossley, head of the wealth management department at law firm Baker & McKenzie in London. “Short-term and transient rather than the long-term putting down of roots will now characterise the UK’s new wealth model.”
After four years in the UK, individuals who have set up trusts will be taxed on the trust income and capital gains, but the trusts will remain free of 40 per cent inheritance tax. After 10 years their entire global assets will be caught by the UK tax net.
The non-dom regime was put in place in 1799, in part to shelter those with foreign property from wartime taxes. A crackdown on the non-dom regime began under then Conservative chancellor George Osborne; from April 2017 foreign residents who had lived in Britain for more than 15 of the past 20 years were deemed domiciled in the UK.
In March this year, then-chancellor Jeremy Hunt stole one of the opposition Labour party’s flagship fiscal policies when he announced the abolition of the non-dom regime.
Reeves followed with proposals to further toughen the crackdown. In last week’s Budget she pressed ahead with reversing a Tory decision to permit non-doms to permanently shield foreign assets held in an offshore trust from inheritance tax, ignoring warnings that this would spark an exodus.
“Who is going to come here and settle, buy a house, start a business, just to know that in four years’ time they’ll have to run for the hills,” said Magda Wierzycka, a Polish-South African billionaire who co-founded financial services company Sygnia in South Africa, and later moved to London in 2018. “They’ll go to Switzerland or Italy or Greece instead.”
After settling in the UK, Wierzycka set up a venture capital firm, Braavos Investment Advisers, in 2019, which works with spin outs from Oxford university to commercialise intellectual property. But following the abolition of the non-dom regime, Wierzycka said she was reluctantly planning to leave the country, largely because of the implications of UK inheritance tax at 40 per cent.
Property advisers expect the non-dom overhaul to have an impact on the real estate market, with new temporary residents in the UK capital choosing to rent rather than buy.
“I suspect some of their demand gets pushed into the rental market, particularly given you’ve got quite a high cost of purchase because of stamp duty,” said Lucian Cook, head of UK residential research at Savills. Those who intended to stay for up to a decade “would probably continue to buy”, he added.