NEWS & VIEWS
Ever since the Autumn Budget announced that the concept of domicile would no longer be a relevant factor in the UK tax system, the headlines have been flooded with news of a mass exodus of Britain’s wealthy non-domiciled residents – those who live in the UK but state their home is abroad. These headlines have, in my view, been greatly exaggerated.
That’s not to say I believe no non-domiciled individuals will leave the UK because of the reforms or that the number that do will be insignificant. Rather that the flight narrative appears to be built on flimsy grounds and that by buying into it too strongly, the wealth management industry could end up under-prepared to support those clients that remain.
Looking past the headlines
When we look past the headlines, the bulk of these exodus stories cite a figure originating from investment advisers Henley & Partners and analytics firm New World Wealth. They estimate that around 9,500 millionaires departed from the UK last year. A period in time when the non-dom regime was for the most part alive and well, certainly for ten months of the year.
The research points the finger at “unwelcome policy decisions” brought in by the government in October, putting particular blame on changes to Britain’s 225-year-old non-dom regime for the outflows. It suggests that the cause of these departures was a policy, that for many of them, hadn’t yet been announced.
Not all these millionaires will be non-doms. But when we look at the demographics of those who claim the status, it is easy to understand how the report has made the link.
Research from the University of Warwick has found that the share of people claiming non-dom status rises rapidly with income. Three in ten individuals who claimed non-dom status in 2018 earned £5 million or more. And less than three in one thousand claiming non-dom status earned less than £100,000. The whole point of the regime and the new one that will replace it are to benefit the very wealthy.
The question is, will these wealthy non-doms now be packing their bags? I’m doubtful.
Will non-doms be packing their bags?
There are many reasons for this, not least the fact that UK taxes remain lower than the G7 average. Other incentives include the opportunity to rebalance assets for CGT or the temporary repatriation facility – neither are trivial reliefs.
The Warwick study found that for majority of non-doms (80%) their main taxable source of income was from employment – not something that necessarily transfers easily overseas. Family ties, children settling in school, language and culture all play a part too.
In a post-Autumn Budget article, the researchers estimated an additional 6% of non-doms left the UK, out of those who had been resident for at least 15 out of the 20 years before the 2017 reforms. And of course, the non-doms that stayed paid more tax and did not feel so strongly about it that they left.
While HMRC research found that over £1billion additional revenue was generated by the changes then introduced, despite 10-12% of non-dom taxpayers leaving the UK.
There were 60,700 non-domiciled individuals’ resident in the UK in the 2022/23 tax year, the latest year on HMRC’s records. This was down by almost 30% since 2014/15 but notably up from a pandemic-fuelled slump in 2020/21.
The Office for Budget Responsibility have estimated a 12% decrease in the population of non-doms in the 2025/26 year is likely because of the tax reform. Based on 2022/23’s numbers, this would be the equivalent of around 7,300 non-domiciled individuals – a smaller drop, proportionally, than seen in the fallout from the pandemic.
We won’t know the true impact of the Autumn Budget’s reforms for some time but presuming the worst and believing that all of Britain’s non-doms have packed their bags could see the wealth management industry fail to properly support those that stay.
The new foreign income and gains regime
The new foreign income and gains (FIG) regime, as well as the new rules for inheritance tax, will see tax complexity increase for those that remain in the UK and become tax-resident. And that’s without mentioning the wide variety of still-in-development transitional tax arrangements that will be introduced from 6 April.
Current non-doms, who are already likely to have complex financial affairs, will need support through all of this from their advisers. And in turn advisers will need access to timely knowledge and expertise about changes to the FIG regime including how foreign income, capital gains and remittances will be taxed under the new rules.
This will ensure their clients maximise opportunities but at the same time avoid unintended tax liabilities and at worst penalties. With the right platform partner, advisers can help with scenario planning and alternative strategies including tax efficient investment planning. Firms that are not properly equipped by their platform provider to support those impacted through this transition will be massively disadvantaged.
Written by Michael Edwards, Managing Director of Financial Software Ltd.
This article first appeared in Money Marketing.