Exemption from tax in the UK on income from outside the UK (Non-Dom) will be canceled starting from the tax year 2025
The Non-Dom status in the UK, which has long provided tax exemptions for wealthy foreigners on their income from outside the UK borders (England, Wales, Scotland, and Northern Ireland), is set to be abolished starting in April 2025. This measure is expected to bring approximately 2.7 billion pounds into the state coffers by 2029.
Historically, to avoid double taxation, the UK’s treasury in 1914 exempted citizens residing outside the country in one of the British colonies from paying tax on various incomes. Today, Non-Dom agreements also apply to those who are not British citizens.
Until today, tax liability has applied both to residents who are not citizens of the realm and to its citizens, where the said exemption in the law allows those who meet the exemption criteria to avoid paying tax on income generated outside the UK. As a result, many residents have avoided tax payments on dividends and proceeds from real estate sales outside Britain, as long as they do not transfer these proceeds into the country or into British bank accounts.
Among other things, the criteria at the basis of this status (Non-Dom status) require the taxpayer to prove that one of their parents was born outside the borders of Britain, or alternatively to prove foreign residence and future prolonged stay in another country. The Non-Dom status has attracted many wealthy individuals from around the world to settle in England, especially in London, as its validity does not depend on British citizenship per se. In this way, the royal road was to purchase real estate in one of the former British colonies in order to obtain a kind of ‘tax haven’ even without residing abroad, for a period of about 15 years, after which the exemption’s validity expires.
Foreign residents with wealth are expected to lose this tax shelter after 225 years
The British government has announced that starting in April 2025, the ad-hoc Non-Dom status will be canceled, which will prevent ‘tax evasion’ by foreign residents with wealth, with expected income to the state treasury amounting to about 2.7 billion pounds by 2029. This is a very significant step by both the tax authorities and the British government, after years of delaying the cancellation of the aforementioned loophole due to fears of double taxation for foreign residents.
As mentioned, the Non-Dom status mainly served foreigners with high wealth to exempt from tax on a large part of their income, and now they will have to pay full tax on all income. According to studies by the London School of Economics and Warwick University, in 2018, more than 40% of residents in Britain with incomes of more than 5 million British pounds per year applied for Non-Dom status. According to HMRC (Her Majesty’s Revenue and Customs), as of 2022, there were about 68.8 thousand such agreements in the UK, most of them with individuals who actually lived in Britain and claimed that their permanent residence was in another country.
Also, as part of the said change, individuals moving to the UK will receive a tax exemption on their foreign earnings only for the first four years after their move.
Among others, those who benefited from the Non-Dom agreement are CEOs of major companies in Britain such as former HSBC CEO Stuart Gulliver, who stated his intention to return to Hong Kong in the twilight years, as well as the wife of Rishi Sunak, the Prime Minister of Britain, who until now has not paid tax on income registered in her name in India.
Mass exodus from London following the expected cancellation
As a result of the expected cancellation of the Non-Dom status, which is set to take effect as early as April 2025, there is expected to be an exodus of foreign wealth owners, as countries like Italy and Spain offer more favorable tax benefits and conditions.
Thus, further tightening of policy is expected, which will completely prevent foreign residents with wealth from evading various tax payments such as inheritance tax on overseas assets held in offshore funds.
The aforementioned changes have troubled the foreign residents with Non-Dom status, so they intend to look for other tax havens around the world, such as Greece, France, Malta, Cyprus, Spain, Portugal, or Italy, which offer various tax benefits such as relatively low uniform tax payment for all wealth owners. In addition, there were those who considered more “traditional” alternatives such as Monaco, Dubai, or Switzerland.
According to the British Chancellor of the Exchequer, Jeremy Hunt, this change was created to establish a fair and equitable tax system and still maintain competition with other countries, but it seems that this cancellation may lead to the opposite result due to the departure of the wealth owners.
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