The UK government recently announced that it will abolish the controversial non-domiciled status, or non-dom, as of the new tax year, April 2025.
While there has been growing concern from tax advisors and wealth planners in the lead-up to the Labour Party’s budget that the change may lead to an exodus of ultra-wealthy individuals from the UK, others point out that it is unlikely too, despite efforts by leading tax havens and other wealth-based destinations attempting to lure the super-rich to their shores.
What is the non-dom tax status UK?
The UK’s non-dom tax status harks back to a 200-year-old tax rule that enables individuals living in the UK to be domiciled in another country, allowing them to avoid paying tax on income or capital gains generated outside of the UK for up to 15 years. However, non-doms must still pay tax on income generated within the UK.
UK residents are taxed on their global income, making non-dom status a highly favourable tax arrangement that leads to substantial savings, especially for ultra-wealthy individuals who generate significant income from overseas assets.
The main route to becoming a non-dom is domicile of origin, whereby an individual must prove that they, or their father, was born in another country and that they plan to eventually return to that country.
Domicile is not the same as residency, which is determined by the amount of time an individual spends in a country each year, and, in many respects, is largely fluid. Instead, domicile is a complex legal concept, one that is typically inherited from a person’s father at birth and reflects a long-term relationship with a country.
How many non-doms are there in the UK?
Data from the UK government shows that there were at least 83,000 non-domiciled and deemed domiciled individuals in 2023. This figure is up 6% compared to 2022, despite the significant tightening of non-dom rules in 2017.
Reports state that three in 10 people with incomes over £5 million use the UK’s non-dom tax status.
The vast majority of non-doms living in the UK are from Western Europe, India, and the US. However, in recent years there have been growing numbers of non-doms from China and former Soviet states. Most non-doms in the UK live in and around London, including wealthy suburbs like Kensington, the City of London, and Westminster.
The combined tax and NIC liabilities for non-doms for the tax year ending 2023 was £12.3 billion.
What is the issue around the UK’s non-dom tax status?
Non-dom status has become increasingly controversial, offering a way for the ultra-wealthy to make considerable tax savings by creating a two-tier tax system, one that favours the wealthy.
A report from the CAGE Research Centre at the University of Warwick states that the removal of the non-dom tax break will raise £3.8 billion annually, vital funds that will help plug the country’s reported £22 billion fiscal black hole.
Beyond the key headlines of fairness and equality, economists argue that non-dom status discourages wealthy individuals from investing and permanently settling in the UK.
The issues surrounding non-dom status, including fairness and social equity, were brought into sharp focus in 2022 following public outcry that Akshata Murty, wife of the then prime minister Rishi Sunak, had non-dom status.
What are the key changes to the UK’s non-dom tax status?
Starting April 2025, the current non-dom tax status will be replaced with a residence-based system. Individuals who have been UK tax residents for more than four years will now be taxed on their worldwide income and gains, matching the tax treatment of UK residents.
To ease the transition, the UK government will offer a Temporary Repatriation Facility, allowing non-doms to remit foreign income and gains accrued before April 2025 to the UK at a reduced tax rate of 12% for a limited period. There will also be a 50% reduction in tax on foreign income for one year for those moving from the remittance basis to the arising basis of taxation.
From April 2025, a residence-based inheritance tax system will be applied. Individuals who have been UK residents for at least 10 years will be subject to IHT on their worldwide assets. Additionally, the use of Excluded Property Trusts to shield assets from IHT will be restricted.
Non-dom tax and the super-rich; will they leave the UK?
There have been multiple reports pointing to millionaires leaving the UK following the removal of non-dom status. Of course, the very fact that they are non-doms means that they were always going to leave the UK at some point. The key question is will their departure be accelerated due to the removal of the tax remittance and will it prevent other wealthy individuals from moving to the UK.
A report that has been roundly quoted in the media is the 2024 Wealth Migration report by Henley & Partners, which pointed to a projected net outflow of 9,500 millionaires this year, more than double the number that left in 2023.
However, it’s important to take a balanced view. As the BBC noted, the report was compiled from tracking a relatively small sample of millionaires and then extrapolating the results. So, the report’s validity relies on the accuracy of that representative sample, something which can be notoriously difficult to get right.
At the other end of the spectrum, a study by researchers from the University of Warwick and the London School of Economics and Political Science, who gained unprecedented access to anonymised tax records of the UK’s non-doms, noted that only 0.3% of those impacted by changes to the non-dom status would leave the UK, less than 100 people. Additionally, they highlighted that these individuals were paying almost zero tax into the UK.
The best guide as to whether the UK’s super rich will leave the UK is to go back to 2017, when the then Conservative government placed several restrictions on non-dom status, reducing post-tax incomes of those eligible by almost a fifth. Only about 5% of those impacted by the reform opted to leave the UK, and most notably, these individuals were paying the least amount of tax.
The non-doms that may leave will be those that are living off capital from overseas, which they were able to remit to the UK tax-free. As economists point out, the vast majority of non-doms are in the UK to work and receive very high incomes that are unattainable almost anywhere else. For most, it doesn’t make financial sense to leave, even with the removal of non-dom tax status.
Where are UHNWIs moving to?
Established and emerging wealth hubs such as Monaco, Switzerland, Italy, Greece, Dubai, Malta, and the Caribbean are just some destinations attempting to capitalise on the UK’s removal of the non-dom tax status to tempt UHNWIs, with countries like the UAE enticing the super-rich with zero tax, golden visas, and an ultra-luxurious lifestyle.
Whether the ultra-rich choose to leave the UK is yet to be seen. However, what we do know is that the world’s wealth hubs are shifting, driven by an increasingly more transient UHNW population and new and emerging destinations challenging traditional wealth hubs like the UK.
According to Altrata’s latest World Ultra Wealth Report, the global UHNW population increased by 7.6 percent to 426,330 individuals, a 20% increase from five years earlier.
The UK UHNW population increased by 10.6% in 2023, up to 15,640 individuals, with London ranking sixth for the city with the highest number of UHNWIs.
The report noted that, “The slow-puncture damage of Brexit to the UK’s economy and international standing remains a constraint on overall wealth-generation prospects, although London’s enduring appeal among the ultra-wealthy as a cultural, financial and real-estate hub will persist.”
The 2024 Knight Frank Report points to strong UHNW growth in India, mainland China, Malaysia, and Indonesia over the next five years. According to the report, Asia’s wealthy population is set to grow faster than any other region globally and is projected to overtake the US as the world’s leading ultra-wealthy hub.
Moving overseas is often a complex procedure, and is a decision that is driven more than just by tax alone. Job prospects, proximity to friends and family, schools, lifestyle preferences, and multiple other factors are all weighed into the decision-making process.
With the scrapping of the UK’s non-dom status now official, it remains to be seen whether UHNWIs will relocate and take their vast wealth with them or if they decide to stick it out and pay their fair contribution to the UK economy.
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