Uncertainty Over UK Non-Dom Tax Reforms: How Doubts Are Creating Barriers to International Investment
Finance experts share insight and context on the abolition of the UK’s non-dom tax reforms and the potential effects this could have
Following a series of proposals, announcements, debates and updates, the British government has confirmed that the abolishment of the ‘non-dom’ tax regime will go ahead from 6th April 2025.
While the justification for the change is around creating a new, simplified tax system where domiciles and non-doms are taxed equally, there are numerous caveats, such as the introduction of a Temporary Repatriation Facility, providing advantages to encourage residents to relocate assets.
Rachel Reeves also announced plans to 'tweak' the transition period at the World Economic Forum, held in Davos in late January, while the government has reiterated its expectations for the new measures to raise £2.7 billion in tax revenue per year.
In light of the complexities, uncertainty and upheaval these staggered, and potentially subject-to-further-reform changes have created, the global financial experts at Chase Buchanan Wealth Management share insight and context about what this may all mean both for non-domiciles and the UK economy.
Why Is the UK Government Abolishing the Non-Dom Tax System?
The subject of heated debate for some time, the non-dom tax regime, in short, enables affluent residents who have a permanent home in Britain to pay domestic taxes only on their UK earnings – while typically nominating a low-tax jurisdiction as their place of domicile.
During the previous government, the Conservative Chancellor had already stated that the regime would be gradually phased out, with a four-year period during which those relocating to Britain would not have to pay tax on overseas incomes and a two-year gradual transition.
Over those two years, existing nom-doms would be incentivised to transfer assets and wealth currently held overseas to the UK, which the Labour government has said it will extend to three years, notwithstanding Rachel Reeves' comments about adjusting the transitional phase.
A new Foreign Income and Gains (FIG) system will replace the non-dom tax regime, which assesses an individual’s obligations to declare and pay taxes in the UK on a residency basis. Critics are raising concerns that this will prompt a mass exodus of affluent non-doms and deter international investment for years to come.
Heading into the transition period, we have already seen a significant increase in demand for financial assistance and wealth management support for relocations. Reports indicate that over 10,000 high-net-worth individuals worth £1 million or more left last year, representing a rise of 157%.
Understanding How the Foreign Income and Gains (FIG) System Will Work
The biggest change is that foreign nationals will no longer be able to rely on their place of domicile as a determinant of where they pay tax. Instead, their tax residency position in the UK will depend on how long they have lived in the country.
Individuals who haven’t lived in Britain for the previous ten years are able to relocate with a four-year exemption period. During this period, they can transfer assets and capital to the UK tax-free. However, after the initial four years, they will be liable to pay tax on all worldwide income and assets.
The transition period we’ve mentioned also enables existing non-doms who already live in the UK to remit wealth held overseas to the UK at a flat rate of 12% tax for two years covering the 2025-26 and 2026-27 tax years, increasing to 15% for 2027-28.
Another meaningful reform is that those paying tax on a remittance basis – or only on UK earnings – can 'rebase' their overseas assets. That means they are only exposed to Capital Gains Tax in the UK if they choose to sell or transfer those assets on the amount the asset or wealth has increased in value since 5th April 2017.
What Is the Controversy Surrounding the Closure of the Non-Dom Tax System?
Generally speaking, there are two primary criticisms of the plans: that they will have an undesirable impact and prompt a large proportion of affluent foreign nationals to leave the UK and stop making any economic contributions altogether and that the reforms will deter wealthy investors from ever considering Britain as a viable destination.
From a wealth management standpoint, our advisers are continually consulting with clients to discuss how and where they hold assets and how these timings relate to tax exposures and their personal financial planning.
The four-year tax exemption, for instance, means that wealth could theoretically be transferred free of income or capital gains for the entirety of that period—but with no incentive to keep it in the UK, where transferring it offshore would remain far more advantageous from a tax position.
Rather than cementing Britain's standing as a tax-efficient location with parity throughout, the big risk is that the UK will be perceived as a useful tool for tax planning. These rules could potentially mean foreign nationals are welcome to relocate to the UK, utilise public services, and move on after four years—without any economic contributions whatsoever.
Other concerns refer to the uncertainty about potential further Capital Gains Tax increases, which is always a vital consideration for affluent investors, individuals and business owners when making key decisions. This could cement the position some non-domiciles or prospective residents may take based on the future higher tax burden linked with moving their assets to the UK.
Will the Removal of Non-Dom Tax Status Weaken the UK Economy?
At this stage, much is speculation, including the £33.8 billion in tax revenues the government forecasts collecting through the policy.
There are no guarantees, and there is a potential that the reforms will prove a success. However, with so many glaring loopholes, the likelihood seems to be that the reforms will lead to lower interest in the UK as a destination and the use of the tax exemption period as a way to 'park' assets with zero tax obligations.
The Institute for Fiscal Studies noted in a 2023 report that those claiming the remittance basis had contributed just over £6 billion in income tax, capital gains and National Insurance, at an average of £170,000 per individual, and that the remittance tax basis has directly raised £77 million from the 2,100 individuals enrolled.
Should a large percentage of those revenues cease to exist, the numbers of wealthy foreign nationals in the UK drop, and the level of interest in cross-border investment weaken, the outcomes may be far less positive than the government hopes for.
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