Modernising the non-dom rules is disruptive but overdue
Jeremy Hunt’s move is blatantly political but there are good arguments for reform
It is a century since the curious concept of domicile was embedded in the UK tax code. Chancellors stretching back to Nigel Lawson in 1988 have considered overhauling this relic of empire.
So Jeremy Hunt’s move to scrap domicile-based reliefs, benefiting those whose permanent home is abroad, is genuinely radical. It risks making the UK less attractive to wealthy foreigners. But this is an opportunity to create a cheaper, better-targeted relief.
Hunt’s move is blatantly political. Still, there are good arguments for reform. Firstly, domicile is a concept — that transcends nationality, residence and ethnicity — which few people understand. Secondly, the mechanics of the non-dom system have perverse implications. It relies on the remittance basis, a concept dating back to the introduction of income tax in 1799, to keep foreign income and gains out of the tax net unless they are brought into the UK.
One awkward consequence is that qualifying as a non-dom requires people to keep a connection with another country. That makes their eventual departure from Britain more likely. Another perverse aspect is that it encourages rich individuals to set up home in Britain but leave their wealth outside it. A business investment relief introduced in 2012 is not much used.
Hunt’s reforms are an improvement in this regard. New arrivals will be exempt for four years from paying UK tax on foreign income and gains — including those remitted to the UK. There is also an incentive for current non-doms who are ineligible for the new regime to bring assets onshore.
Keeping some form of tax concession for newcomers makes sense, not least because other countries such as Italy, the Netherlands and Spain have similar incentives. But the regime outlined by Hunt is a lot less generous than the scheme it replaces. An estimated 5,500 people are set to pay UK tax on their foreign income and gains from 2025.
Transition arrangements ease the pain. And the chancellor is likely to have drawn reassurance from research showing a minor impact from 2017 reforms that increased taxes for those who had been in the UK for more than 15 years. But some backlash is inevitable: there is a risk that the reforms drive away a greater number of high earners than expected.
A lot of guesswork is involved here. The Office for Budget Responsibility reckons that between 10 per cent and 20 per cent of current non-doms who are ineligible for the new regime will leave the UK. There is a high degree of uncertainty about whether the initiative will raise the mooted £2.7bn a year.
There is also a risk of alienating workers, investors and entrepreneurs that the UK wants to attract and keep. The City of London may be wary. More than one in five high-earning bankers — those in the top 1 per cent of earners nationally — have benefited from non-dom status at some point, according to research by the LSE and University of Warwick.
Change was coming anyway. The Labour party, which has a huge poll lead, had pledged to introduce a less generous system. It would be good if some cross-party consensus could be achieved on the reforms. After years of political turmoil, attracting the best and brightest also requires the UK to regain its reputation for stability.