UK to Overhaul Non-Dom Tax Regime: Major Reforms Expected to Impact Revenue and Migration

The UK government is set to implement significant changes to its non-domiciled (non-dom) tax system, effective from April 2025. The proposed reforms aim to replace the current system, which allows non-doms to avoid tax on overseas income for up to 15 years, with a new regime that offers this benefit for only four years. This initiative is part of Labour’s broader strategy to address perceived inequalities within the tax system.

Initially, the Office for Budget Responsibility (OBR) projected that the overhaul would generate an additional £3 billion annually. However, the OBR has since acknowledged considerable uncertainty in these projections due to unpredictable responses from non-doms to the changes.

A recent survey by Oxford Economics suggests that the non-dom population in the UK could decrease by as much as 32% due to the new rules, potentially leading to a £0.9 billion reduction in tax revenue by 2029-30. The study, which included responses from 73 non-doms and 42 tax advisers representing a total of 952 non-dom clients, revealed that 63% of non-doms are either planning or considering leaving the UK within the next two years.

Chris Etherington of RSM has expressed concerns regarding the lack of comprehensive research behind the proposed reforms. He warned, “The Chancellor could find her financial forecasts are built on sand if we see large numbers of non-doms leaving the UK. The proposals have arguably been driven more by politics than economics.”

The survey also highlighted the substantial investments non-doms hold in the UK, totaling £8.4 billion. If they were to leave, 96% of these individuals indicated they would significantly reduce their investments in the UK. Additionally, 83% of non-doms cited changes to inheritance tax as a major concern influencing their decision to emigrate.

Under the new rules, wealthy foreigners will be subject to inheritance tax on their worldwide assets after 10 years of UK residence. The reforms will also remove the previous exemption on foreign assets held in trust. Oxford Economics warns that these changes could trigger a “large migration” of non-doms, potentially impacting both the UK economy and tax revenues.

In defense of the reforms, an HM Treasury spokesperson stated, “We are committed to addressing unfairness in the tax system. That’s why we are removing the outdated non-dom tax regime and replacing it with a new, internationally competitive, residence-based regime focused on attracting the best talent and investment to the UK.”