The big news from chancellor Jeremy Hunt’s Spring Budget was the abolition of the non-domiciled tax regime and the announcement of a new, modernised ‘tax holiday’ for individuals moving to the UK.
This announcement represented the most significant reforms to the non-dom tax regime in a generation.
What is the non-dom tax regime?
The non-dom tax regime dates back to when income tax was first introduced in 1799, where residents were only taxed on income arising abroad to the extent that it was received in this country.
This was the first incarnation of the ‘remittance basis’ of taxation and was only modified in 1914 where the eligibility was restricted to residents who were not domiciled or not ordinarily resident in the UK.
The ’remittance basis’ regime, used by non-domiciled individuals, has broadly remained the same since the 1900s.
There were broad ranging reforms in 2008 and 2017, but the fundamental principles have not changed: that a non-dom is only taxed on their overseas income and capital gains to the extent the monies are brought to or used in the UK.
Since 2017, a non-domiciled individual could elect for the remittance basis of taxation for a period of 15 years.
After that period the individual is treated as ‘deemed domiciled’ for taxation purposes and taxed on a worldwide basis, however, a non-dom could establish a non-UK trust before the expiry of their 15-year term, and the trust would be theoretically exempt from UK tax in relation to non-UK sources.
The notion that a person’s domicile should determine their basis of assessment for tax is unusual.
In many regards, domicile, which is inherited from your father at birth, is an outdated concept and not easily understood.
In recent years, HMRC have raised an increasing number of enquiries to test whether someone is not UK domiciled, and there is a good degree of subjectivity involved.
Why is the government abolishing the non-dom regime?
The UK’s non-dom regime has been hugely popular with wealthy overseas individuals and families, attracted by the generous tax breaks.
The non-dom regime was the envy of many European countries, and the likes of Italy, Spain and Portugal created their own versions to attract private wealth to their shores.
There has been a longstanding tension with the non-dom regime: why should a wealthy foreigner pay less tax than someone who was born in the UK.
A recent academic study, using HMRC taxpayer data records, suggested that abolishing the non-dom regime would raise more than £3bn for HM Treasury.
The Labour Party had made abolishing the non-dom regime a key cornerstone of its tax policy and they pledged to use the tax revenue raised to pay for 7,500 doctors and 10,000 nurses and midwives for the NHS, if elected into government.
Hunt took firm aim at Labour’s flagship tax policy by abolishing the non-dom tax regime at the Spring Budget, grabbing hold of the additional £2.7bn tax revenue to partly pay for his 2 per cent national insurance cut.
