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Economics CAGE Research Centre

Non-dom reforms and why it matters to the UK economy

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Non-dom reforms and why it matters to the UK economy

Thursday 7 Mar 2024

Yesterday the Chancellor announced a change to the tax rules for “non-doms” when he set out the 2024 budget.

CAGE Research Associate Dr Arun Advani has been researching this rather unique UK tax category as part of his long-standing interest in making UK tax more efficient and fairer.

As part of his wider work into taxation of income from work relative to income from wealth, Arun has developed the evidence base into the effects of the non-dom regime. He has subsequently been making the case for reform based on his findings and was delighted to see his work reflected in yesterday’s announcement.

What are non-doms?

Non-dom status gives tax breaks to some of the UK’s wealthiest residents, if they are foreign-born and claim that their permanent home is abroad. Even when living in the UK all year round, non-doms are able to claim a special tax privilege which allows them to not pay tax on investments they have abroad.

Why did it need reforming?

  • Fairness: non-dom status only benefits those who hold large amounts of wealth abroad.
  •  UK investment: since the tax benefit only applies to overseas investment, non-doms are encouraged to invest their money anywhere except the UK.
  •  Retaining talent: Anyone arriving the UK to settle permanently is not eligible for non-dom status. The system therefore discourages overseas talent from staying and invest in the UK on a long term basis.
  • Tax revenue: CAGE research has demonstrated that abolishing the non-dom scheme would raise £3.6 billion in additional Income Tax and Capital Gains Tax revenue every year. It also provides options for how much revenue would be raised by limiting the length of time the benefit can be received, which is what the government has done.

Dr Advani’s research

In partnership with tax experts at the LSE, Arun used confidential, anonymised HMRC data to look at:

  • who non-doms are
  • what they do
  • where they are from
  • where they live

The findings were published as a Policy Briefing in April 2022. It was the first research to take a systematic look at the UK’s non-dom population using tax data covering everyone who has claimed non-dom status over the past two decades. Speaking on the day the research was published, Arun said “Use of the remittance basis is a perk that benefits the very wealthiest. At the moment there are no official stats on what it costs us, nor what the benefits are. So we're doing our own work to get some numbers, coming over 2022.”

Arun and the LSE team established that abolishing non-dom status would raise around £3.2bn a year. This gave the Treasury robust data against which they could review their policy decisions. Another Government concern was that abolishing non-dom status would mean that high net worth individuals would simply leave the UK. Arun and LSE colleagues were able to evaluate the likely impact of changes and show that any such effect would be small.

What has changed?

The Chancellor announced that from April 2025, new arrivals to the UK will only be able to avoid tax on overseas income and gains for the first four years of their residency. If they continue to live in the UK after four years, they will pay the same tax as everyone else. Those currently benefitting from non-dom status will have a two-year transitional period during which they will be encouraged to bring their overseas wealth into the UK.

Commenting on the policy changes, Arun said:

“Overall this is a good reform, simplifying the regime to provide more certainty for the taxpayer and HMRC, and limiting the scope of the benefit to something much more justifiable.

“However, there was a missed opportunity to use the reform to incentivise investment in the UK. Instead, for the first four years at least, we will continue to penalise immigrants on any investments they choose to make in the UK.

“There are also some rather unnecessary giveaways to current beneficiaries of the regime, allowing them to wipe out the tax that would be owed on some of their capital gains, and giving them a year to get their affairs in order if they want to avoid inheritance tax.”

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