Jeremy Hunt has axed the UK’s tax breaks for non-doms, in a U-turn that mirrors Labour policy and which the chancellor said was because he believed “those with the broadest shoulders should pay their fair share”.
Existing rules, a legacy of the colonial era, allow an estimated 70,000 foreign nationals who live in the UK to avoid paying UK tax on their overseas income and gains. From next year, new arrivals will only be able to avoid tax on overseas earnings for the first four years of their residency.
It emerged that Rishi Sunak – whose wife, Akshata Murty, has been among the best known non-domiciled residents – recused himself from policy talks ahead of the budget in order to avoid a potential conflict of interest.
However, Hunt has decided to shelter overseas assets placed in trusts by non-doms from inheritance tax. Murty’s family stand to benefit from the measure, as do others currently registered as non-doms. A window has also been left open for non-doms looking to avoid inheritance tax by giving them until 6 April to place assets in trusts.
The new “modern, simpler, residency-based system” will raise £2.7bn a year overall, MPs were told by Hunt. But he said that transitional arrangements were to be put in place for those benefiting from the current regime “recognising the contribution of many of these individuals to our economy”.
This will include a two-year period in which individuals will be encouraged to bring wealth overseas to the UK, a measure that the chancellor said would attract an additional £15bn of foreign income and generate more than £1bn of extra tax.
Hunt, who has been vocal in the past against axing the status, saying in 2022 that he “would rather wealthy foreigners spent their money in Britain”, drew laughter from the opposition benches when he claimed that he had been looking at the issue for many months. Sunak himself had also claimed in 2022 that scrapping the status would end up “costing Britain money”.
A person who is registered as non-domiciled with HM Revenue and Customs does not have to pay UK tax on income and capital gains earned overseas – including on company stocks or cash made from selling a second home – unless they bring their money into the UK or deposit it into a UK bank account.
Murty has been a non-dom in the UK as a citizen of India, but has “voluntarily” been paying tax on income from her estimated £750m shareholding in her family’s IT empire. She receives millions of pounds a year in dividends from the stake in Infosys, and had potentially been avoiding up to £20m in UK tax on that income, the Guardian reported in 2022.
The rules currently allow those claiming the tax break to do so for a maximum of 15 years. But they must pay an annual levy of £30,000, which rises. The charges mean the tax break is only worthwhile for the wealthiest.
Three in 10 people with incomes over £5m make use of non-dom status, compared with only three in 1,000 people with incomes below £100,000.
However, additional details not mentioned in Hunt’s speech softens the blow for some of the most wealthy, while an academic whose team produced the figures that Hunt based his £2.7bn figure on said many would still be incentivised to invest abroad.
“This new policy is going to raise money, is fairer and is unlikely to lead to lots of people leaving the UK,” added Arun Advani, an assistant professor of economics at the University of Warwick.
“Moving to a resident system makes things more modern, more up-to-date, more straightforward to operate. But the main question is around disincentivising investment in the UK.”
The government is also effectively missing out on an opportunity to collect more by giving existing non-doms an option to “rebase” the value of capital assets to 5 April 2019. This means they will only be taxed on any gains they make after that date.
“So if people have held assets for long periods stretching back before the start of April 2019 all of the gains have been wiped out, which does seem like quite a giveaway,” said Advani.
Current non-doms will also be able to avoid inheritance tax on offshore earnings by placing them in trusts. While the government has pledged to consult on this, Treasury briefing notes make it clear anyone with assets in trust prior to 6 April 2025 will keep them permanently outside the net for death duties.
Hunt said the removal of the non-dom breaks would go towards cutting taxes for “working families” rather than the spending pledges of Labour, which had promised to put the money into public services, including the NHS.
A Labour spokesperson said the party stood by spending plans that would have been funded by the scrapping the non-dom tax status, describing Hunt’s announcement as a “humiliating U-turn” that would have made billions of pounds available if it had been announced years earlier.
However, there was unease among Tory MPs of different hues. On the right, Jacob Rees-Mogg said the government wanted as many billionaires to come, adding: “Attacking them, making it harder for them, may mean stealing the Labour party’s clothes but is not good economic policy.”
Stephen Hammond, a leading member of the party’s One Nation centrist grouping, said: “I’m always quite concerned about political trickery, and I would guess that guess most people think they’ve done this to stop the Labour party spending money, rather than at reforming the tax regime. And I question whether that’s a good idea.”
