The UK’s Shift from Non-Dom to Residency-Based Tax System: Implications for HNWIs

The UK government is bringing about a landmark shift in its tax policy, ending a 225-year-old regime that allowed many of its wealthiest residents to avoid paying taxes on foreign income. The decision to abolish the non-domiciled (non-dom) tax status marks a significant policy change by Britain’s Conservative government. Today, we will explore the current non-dom system, the proposed changes, and the implications for high-net-worth individuals.

Understanding the Non-Dom Regime

Under the existing non-dom regime, individuals residing in the UK but domiciled elsewhere could opt to pay tax only on the income they brought into the country. This system allowed them to avoid paying UK tax on foreign income and gains for up to 15 years. Historically, this regime aimed to attract globally mobile investors by offering significant tax advantages. In 2022, there were an estimated 68,800 non-doms in the UK, highlighting the regime’s broad use among the affluent.

The non-dom status, dating back to 1799, has positioned the UK as a favorable location for wealthy individuals, significantly impacting the country’s tax base and economic landscape. For instance, in 2018, more than 40% of UK residents earning over £5 million annually claimed non-dom status, demonstrating the regime’s appeal to high earners.

The New Residency-Based Tax System Explained

Chancellor of the Exchequer Jeremy Hunt’s announcement earlier this year introduced a shift to a residency-based tax system, set to take effect from April 2025. The new system will remove the option to be taxed on a remittance basis and instead, tax individuals based on their residence status in the UK. 

Under the old non-dom regime, HNWIs could potentially avoid paying UK taxes on their foreign income and gains for up to 15 years, provided these were not remitted to the UK. The new system reduces this period significantly, offering tax exemptions only for the first four years of residency. This shorter period could lead to higher tax liabilities sooner than under the previous regime.

The new system also abolishes the option to be taxed on a remittance basis, where foreign income and gains are only taxed when they are brought into the UK. With the abolition of this option, all foreign income and gains of a UK resident, after the initial four-year period, will be taxed on an arising basis – meaning they are taxed regardless of whether they are brought into the UK or not.

By transitioning to a residency-based system, the UK tax authorities will also now consider all global income and gains of HNWIs after the initial four-year period, which could significantly increase their tax burden, especially for those with substantial income and assets outside the UK. For HNWIs who have utilized the non-dom status to shield large portions of their income from UK taxes, the new regime will likely result in a higher overall tax burden. 

Economic and Fiscal Impact on the UK Economy

Allowing new UK residents to enjoy complete tax relief on foreign income for the first four years of their UK residency aims to maintain the country’s attractiveness to international professionals and investors despite the tightened regulations. The government plans several transitional measures to ease the shift for current non-doms. These provisions ensure that individuals already in the UK under the old system can still benefit from the non-dom advantages until the end of their eligible period.

The reform will retain the Overseas Workday Relief as well, simplifying it to support UK residents in their initial years. This relief provides tax exemptions on earnings for work carried out abroad, facilitating the global mobility of professionals. The changes also signal a forthcoming consultation on aligning inheritance tax with the new residency-based framework, aiming for a consistent approach across different tax types.

The abolition of the non-dom regime is projected to generate £2.7 billion annually by 2029, marking a substantial increase in revenue for the UK government. This aligns with broader fiscal reforms, including tax cuts for workers and increased taxes on luxury airfares, unveiled in the budget announcement earlier this year. These measures aim to balance the tax burden more equitably.

Want to Explore Options for Tax Optimization?

As the UK introduces its new residency-based tax system, many UK residents are contemplating relocation to optimize their taxes. This shift has highlighted the attractiveness of certain countries that offer significant tax advantages:

United Arab Emirates: Through its Golden Visa program, the UAE offers a tax-free environment for personal income and capital gains, making it a highly attractive destination for those seeking tax optimization. The country does not impose personal income tax, allowing residents to retain more of their global earnings. There is generally no tax on capital gains from the sale of investments or assets, although certain specific conditions may apply depending on the emirate and the nature of the investment​.

Malta: Through its Global Residence Program, Malta offers a special tax status which provides for a flat tax rate of 15% on foreign income remitted to Malta, with a minimum tax of €15,000 per year. There are no inheritance or wealth taxes in Malta. Additionally, capital gains realized outside of Malta are not taxed even when remitted to Malta, provided the individual is not domiciled in Malta. This program provides considerable tax benefits, especially favorable for individuals with high foreign income​.

Cyprus: Through its Permanent Residency Program, Cyprus also offers a favorable tax regime for non-domiciles. Non-dom residents in Cyprus are exempt from tax on worldwide dividends and interest income for a period of 17 years. Cyprus also boasts one of the lowest corporate tax rates in the EU at 12.5% and does not tax capital gains on foreign assets, except for real estate located in Cyprus. There is no inheritance tax in Cyprus, making it a beneficial option for estate planning​.