UK SCRAPS NON-DOM TAX STATUS

In a move that is expected to have implications for the Cayman Islands along with other countries, the British government has abolished what is known as the non-dom (non-domiciled) tax status.

In his Spring 2024 budget on March 6th, the UK’s Chancellor of the Exchequer (Minister of Finance) Jeremy Hunt said this would close a loophole in the country’s tax system and would raise an estimated £2.7 billion (CI/KYD2.8 billion) for the British treasury.

However, not all of that money would be diverted from the Cayman Islands only as this widely applies to persons eligible for UK tax but who have benefited from the non-dom status globally.

According to the British government’s own statistics, there were 68,800 people claiming non-dom status in 2022.

People utilising the non-dom status to their advantage reside in the UK, but have their home overseas for tax purposes and do not pay UK tax on money their earnings elsewhere.

As explained on its website: “Non-doms are individuals whose permanent home, or domicile, is considered to be outside the UK. The current non-dom regime is a favourable tax regime which allows non-doms who are UK residents to opt to use the remittance basis of taxation.”

It further states that “the combined tax and NICs (national insurance contributions) liabilities of £12.4 billion for tax year ending 2022 for all non-domiciled and deemed domiciled taxpayers is the largest annual tax liability from this combined group since our figures began in 2008.”

The non-dom tax regime has been a dominant issue leading into the budget presentation and is likely to be a hot topic in the campaign for the next UK general election expected this year.

“The system has allowed wealthy foreign immigrants to enjoy all the benefits of living in the UK, while paying very little in UK taxes because they make the bulk, if not all, of their income abroad,” said Professor Ronen Palan from City, University of London’s Department of International Politics.

“The regime can be used, or sometimes abused, by foreigners, or British citizens, to avoid paying tax altogether. While in principle they are required to pay tax in the countries where income is earned, the fact that they live (and are tax residents) in the UK makes it easier to arrange their affairs and end up paying little or no tax at all. The result is that many of the wealthiest families living in the UK are not contributing to direct taxation in the UK,” he added.

In what has been widely interpreted as a huge policy u-turn, the decision by the UK Conservative government to scrap the status came as a surprise as the party has been against removing it.

In making the announcement, Mr Hunt however offered a phased elimination of the status saying there would be transitional arrangements for those currently benefiting from it.

From April 2025, people who move to the UK will not have to pay tax on money they earn overseas for the first four years.

After that period, if they continue to live in the UK, they will pay the same tax as everyone else.

Those people who currently have nom-dom status will be allowed a two-year transition period, during which they will be encouraged to bring their foreign wealth into the UK system.

 “The government will abolish the current tax system for non-doms, get rid of the outdated concept of domicile and the remittance basis in the tax system, and replace it with a modern, simpler and fairer residency-based system.”

Mr Hunt estimates that abolishing the non-dom status will raise £2.7bn a year for the government by 2028/29.

However, the opposition Labour Party has been campaigning to abolish the non-dom exemption. The Labour Party which has been consistently leading the Conservative government in recent polls has made scrapping the status a policy priority and has accused to Conservative government of stealing its idea.

The Labour is highly tipped to win the next UK general election due this year and the non-dom status and other preferential tax arrangements in the UK’s Overseas Territories are known to be in its sights for review.