U.K. Chancellor to Adjust Crackdown on Non-Dom Residents in Response to Wealth Transfer Outflow
The government's escalating tax pressure on non-UK residents may cause a wealth drain from the UK
With the announcement of the Labour government's persistence in phasing out non-UK domicile (non-dom) status, high-income individuals could potentially leave the UK, fearing increased taxes. Rachel Reeves, the chancellor, confirmed this policy change in her Autumn Budget.
Reeves further suggested that overseas earnings would be added to an individual's estate for inheritance tax purposes. This adds to the growing concern over the Tory government's reductions in capital gains and dividend allowances. Analysts at Henley & Partners reported a net outflow of 10,800 high-net-worth individuals from the UK in 2024.
These shifts may poorly affect the UK's economic growth and reduction of the deficit, as wealthy individuals are key contributors to the national wealth.
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Stranded by the tax squeeze
Many high-wealth individuals residing in the European Union and United Arab Emirates contemplate leaving the UK due to the decrease in tax benefits. Marc Acheson, a global wealth specialist at Utmost Wealth Solutions, expressed that clients are exploring other jurisdictions to avoid the new changes, particularly the erosion in inheritance tax protections on existing settlements.
Critics argue that axing non-dom status would deprive the UK of growth as wealthy individuals thrive on UK services while keeping significant assets offshore.
What is non-dom status?
Non-dom status refers to someone's tax residency, permitting wealthier individuals to reside in the UK for a predetermined period but pay taxes based on their earnings in other jurisdictions, often where rates are lower. This arrangement allows them to evade UK tax on foreign income while being taxed only on earnings within the UK.
A well-known non-dom is Akshata Murty, wife of former Prime Minister Rishi Sunak. Detractors contend that non-dom status unfairly benefits individuals who drain the UK's resources while keeping most of their wealth offshore.
Non-dom status evolution
Although initially planned by the Conservative government, the changes to non-dom status are expected for those moving to the UK after April 2025. These changes mean that individuals will no longer be required to pay tax on overseas earnings for the first four years. If they choose to stay long term, they will be taxed like everyone else.
Existing non-doms will be given a two-year transition period to bring their foreign wealth to the UK and avoid an unfavorable tax liability. The Labour's October 2024 Budget has extended this transition period to three years. Additionally, foreign earnings will now be included in the inheritance tax system.
While the non-dom status is still set to be eliminated, Rachel Reeves has hinted at moderating the transition period to increase its appeal. Future amendments will be presented in Parliament.
Despite the altered transition period, some doubt its effectiveness in preventing the exodus of wealthy individuals, including those leaving in response to potential inheritance tax on overseas assets. As Dhana Sabanathan, private wealth partner at law firm Michelmores, explains, the current announcement is unlikely to reverse the concerning trend of wealthy individuals leaving the UK.
However, this transition might provide temporary relief to the prime London sales market. As Dominic Agace, chief executive of the Winkworth estate agency, stated, "the temporary reversal on measures is welcome, although on the surface, it seems insufficient."
It remains uncertain whether the chancellor will proceed with plans to include foreign earnings in the inheritance tax system, causing continued apprehension and concerns.
Non-dom status: The hunt for new strategies
While the UK reviews the proposed changes, analysts like Jeremy Savory of Savory and Partners argue that the new measures will not effectively curtail the emigration of millionaires from the country. He suggests implementing longer timeframes for wealthy individuals to settle in the UK, offering relief and helping boost the investment opportunities in the UK.
- The decision by the Labour government to phase out non-dom status could lead to a significant shift in the business landscape, as high-income individuals might relocate, adversely impacting the UK's economy and general news.
- With the increase in tax pressure on non-UK residents and the addition of overseas earnings to an individual's estate for inheritance tax purposes, the finance sector and political arena may witness increased debate over property matters, as wealthy individuals explore alternative jurisdictions to protect their assets.
