UK's Move to Tighten Tax Regulations for Wealthy Expats Generates $3 Billion

The United Kingdom is getting rid of a 225-year-old rule that has allowed its wealthiest residents to pay very little tax on their foreign earnings. This rule, known as the non-domiciled tax regime, was even used by the prime minister's wife at one point.

The decision to abolish the non-domiciled tax regime marks a change in direction for the UK's Conservative government. Previously, they had refused to eliminate this status, fearing that it would make the country less attractive to wealthy foreigners and investors who have the ability to spend a lot of money.

UK finance minister Jeremy Hunt informed parliament on Wednesday that those with the broadest shoulders should pay their fair share. After thorough consideration over several months, he has concluded that a fairer system can be implemented while remaining competitive with other countries.

According to HM Revenue & Customs, the UK had an estimated 68,800 non-doms in 2022. Non-doms are individuals residing in the UK who assert a permanent residence in another country.

Non-doms have the option to avoid paying taxes on income and capital gains earned outside of the UK for up to 15 years after moving to Britain, as long as they do not bring that money into the country.

A harbour in Monte-Carlo, Monaco in May 2023. The principality is renowned for its ultra-low-tax regime.

A harbour in Monte-Carlo, Monaco in May 2023. The principality is renowned for its ultra-low-tax regime.

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Many of them are very wealthy. According to research from the London School of Economics and Political Science, and the University of Warwick, in 2018, over 40% of UK residents earning £5 million ($6.4 million) a year claimed non-dom status.

Under Hunt's new rules, individuals relocating to the UK will be exempt from tax on foreign earnings for only the first four years of residency. Hunt stated that these changes, set to take effect in April 2025, will be part of a "modern, simpler, and fairer residency-based system." It is projected that these changes will generate £2.7 billion ($3.4 billion) annually for the government by 2029.

The non-dom regime, according to economics professor Arun Advani from the University of Warwick, is considered an outdated colonial concept. It categorizes an individual's tax status depending on where they are planning to live.

Tax breaks for non-doms have been in place since 1799, as the London School of Economics notes. This was a measure taken by the government to shield the aristocracy from paying tax on their properties in British colonies.

On the other hand, a residency-based system, as explained by Advani, determines the tax obligations of individuals based on the amount of time they reside in the country. This method is widely adopted by most countries around the world.

In Hunt's budget announcement on Wednesday, some changes were revealed. These changes involved tax cuts for workers and increased taxes on business- and first-class airfares, all leading up to the upcoming general election. The Labour Party, on the other hand, had mentioned earlier that they would get rid of the non-dom regime if they won the election and use the funds for the National Health Service.

Political pressure has been mounting to eliminate the system since 2022. This was triggered by the revelation that Akshata Murty, who is married to Prime Minister Rishi Sunak, was listed as a non-dom. She was also benefiting from tax breaks on income linked to her father's software business in India.

Britain's Prime Minister Rishi Sunak with his wife Akshata Murty at a state banquet at Buckingham Palace in London in November 2023.

Britain's Prime Minister Rishi Sunak with his wife Akshata Murty at a state banquet at Buckingham Palace in London in November 2023.

Yui Mok/Pool/AFP/Getty Images

Murty has decided to give up those benefits, mentioning the "British sense of fairness" and the interference her tax status caused for her husband, who was the UK's finance minister at that time.

However, in November 2022, Hunt supported the "non-dom" status.

He told the BBC that he won't do anything to harm the UK's long-term appeal, even if it makes it easy for opposition parties to criticize him, as reported by several UK media outlets.

Editor's P/S:

The abolition of the non-domiciled tax regime marks a significant shift in the UK's tax policy. This outdated colonial concept, which allowed wealthy individuals to avoid paying taxes on their foreign earnings, has long been criticized for its unfairness and the loss of revenue it has caused the government. The decision to end this practice is a step towards a more equitable tax system and will help to ensure that everyone pays their fair share.

The political pressure that led to this change