Non-doms caught up in UK ‘fiscal drag’

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Wealthy individuals who benefit from the UK’s non-dom rules paid record sums to the exchequer in the past tax year, in spite of tighter rules governing the regime.

HM Revenue & Customs raised £8.5bn from non-domiciled taxpayers in 2021-22, it said on Thursday. Receipts were at their highest level since rule changes were introduced in 2017, while the number of non-doms remained well below levels seen before the pandemic.

Frozen tax thresholds have boosted the receipts from non-doms, highlighting the effects of so-called “fiscal drag”. Labour has pledged to abolish the current regime if elected next year, arguing that the current system is an “outdated tax perk” which confers an unfair advantage on a few people.

Scrapping the regime may raise billions for the exchequer, but chancellor Jeremy Hunt warned last year it could have “dynamic effects” that make the UK less attractive for foreign investment.

“These are people who are highly mobile, and I want to make sure we do not do anything that inadvertently loses us more money than we raise,” Hunt told MPs in November.

The Treasury said non-doms contributed taxes and investments that helped pay for public services. It said it wanted the UK “to be a destination that will attract talented people to work and to do business here”.

Non-dom status exempts foreign nationals from paying UK tax on their overseas income and capital gains, despite being resident in Britain. Any remittances are taxable, while foreign assets are free from inheritance tax.

Receipts from this group have gradually increased since changes introduced by the Conservative government in 2017 meant thousands lost permanent non-dom status and were instead classified based on the amount of time they had been resident in Britain.

Individuals “deemed domiciled” — foreign nationals residing in the UK for at least 15 of the past 20 years — must pay tax on all income and capital gains. Annual charges apply to any foreign national who has been resident for more than seven years, but wishes still to benefit from the status.

Non-doms and those deemed domiciled together contributed £12.4bn in the 2021-22 tax year, according to HMRC. This was the highest level since records began in 2008.

Richard Murphy, a professor of accounting practices at the University of Sheffield, said scrapping the regime would bring a degree of fairness to the tax system. “Political resistance to change is diminishing, and the number of people who are non-domiciled is reducing.”

But he cautioned any move would introduce challenges for foreign nationals deployed to the UK for short periods of time. Labour has committed to maintaining some form of time-limited benefit to prevent temporary workers being taxed at home and overseas.

HMRC said receipts showed there were signs of improved retention of non-doms, challenging claims that rule changes had forced wealthy individuals to leave.

Researchers from the University of Warwick and the London School of Economics estimate that Labour’s plans would net approximately £3.6bn for the exchequer with few non-doms expected to leave in the event of further reforms.

“People’s general interpretation of non-doms is that they are oligarchs living off wealth abroad,” said Andy Summers, an associate professor at LSE and co-author of the study. “By far the majority work in finance and professional services.”

The study found that non-doms currently saved more than £125,000 on average in income tax and capital gains each year. Researchers accounted for alternative planning options available to wealthy individuals in the event the non-dom regime was scrapped.

Summers added: “The typical non-dom is a city financier working in London for a very good wage who has some assets held abroad.”

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