Non-doms in London ask: ‘Should I stay or should I go?’
Guillaume Rambourg was an ambitious graduate when he left his native France in 1994 to live in London in pursuit of a career in finance.
Three decades later, and — although Rambourg has retired from working in financial services and moved abroad for a period — he once again lives in London with his family.
“I feel very good living here in London, it’s a melting pot, people come from many different countries — it’s a multicultural city,” says Rambourg, now 53. “Five of my children were educated in London, most of my friends are here. We complain about the weather, but the city has so many attractive things to offer.”
Rambourg is one of the 74,000 people in the UK who claim “non-domiciled” tax status: residents whose permanent home is overseas for tax purposes. As such, non-doms pay UK tax only on money that they earn in the UK, and their overseas money is tax-free for up to 15 years, as long as it is not remitted back into the country.
For years, this regime has allowed individuals to reap the benefits of a lower tax bill. It can be traced back to 1799, when it was introduced to protect those with foreign property from the UK’s new wartime taxes.
However, the regime was kept in place after that time, and has continued to allow residents to cite another country as their tax domicile. UK non-doms are thought to have at least £10.9bn in offshore income and gains that is free from tax in the UK, according to a research paper by Warwick University and LSE.
But, from next April, this whole regime is set to be abolished — marking one of the biggest ever tax upheavals for the ultra-wealthy in Britain. The chancellor, Rachel Reeves, is expected to announce further details in her autumn budget.
As a result, some non-doms have left the country, and others are considering doing so. “A lot of people I know are using this as an excuse or reason to leave the UK,” reports Rambourg. “Some have already left.”
Rambourg is not deterred by the non-dom regime change, though. “It’s not going to be a reason for me to leave the UK — this is where my children live, my family, my friends, my business,” he argues.
Ending non-dom status was first proposed by the UK’s former Conservative government, but will be enacted under the manifesto proposals of the newly elected Labour government and take effect next year. Labour has said the changes it introduces will make the tax system fairer and raise revenue to improve state education and the NHS.
Under the current rules, the regime grants non-doms, who have been UK residents for less than 15 years, full tax relief on income and gains earned and kept overseas. This regime costs nothing for the first seven years before an annual fee kicks in. After 15 years, assets become subject to the three main UK taxes — income, capital gains and inheritance — unless the money is placed in a trust before this time. Removing non-dom status could raise £2.7bn a year by 2028-2029, according to figures put forward by the outgoing Conservative chancellor Jeremy Hunt.
To Nimesh Shah, chief executive of accountancy firm Blick Rothenberg, it represents a historic change. “We’ve had the non-dom regime in pretty much the same form since the 1800s,” he says. “It’s been around a long time. If you earn money abroad and leave it there, you’re not taxed on it. But that old-world regime where you get tax relief on overseas earnings is going.”
Some financial services professionals expressed shock when the changes were put forward by the former Conservative government, as it was the then opposition Labour party that had first proposed abolishing non-dom status.
“To our real surprise, the Conservatives decided to substantially dismantle [the non-dom regime],” says David Denton, a technical specialist at wealth manager Quilter Cheviot. “That started the rumours that lots of non-doms would leave. I know a few wealthy non-doms with property overseas who have said, ‘Enough is enough, I’m going.’”
Under the proposed overhaul of the regime, people arriving in the UK would be allowed tax relief on their foreign earnings for the first four years of residence, before they become liable to UK income and capital gains taxes.
And, in a further blow to wealthy non-doms, the Labour government has said trusts will no longer offer permanent protection from UK inheritance tax, which is levied at 40 per cent.
“Trusts have been around for centuries; many non-doms have them,” points out Shah at Blick Rothenberg. “So this will be a big cliff edge.”
Nick Ritchie, senior director of wealth planning at RBC Wealth Management, says the lack of protection from inheritance tax has made the non-dom regime overhaul “a bit more shocking”.
Some of his clients have already decided to leave the UK as a consequence, although he notes these have been the ultra-wealthy who “don’t have as many ties to the UK, have multiple properties and are able to change at short notice”.
The bulk of Ritchie’s clients, however, are still in a holding pattern. Part of the problem for non-doms is that the full details of the new regime change have yet to be announced. Although the budget could provide more clarity, the government has not said whether this will result in draft legislation.
“They recognise these changes will be drastic in terms of how they will be taxed on their global asset base but, in the absence of specific policy, they’re more scenario planning,” says Ritchie of his concerned clients.
Stuart Adam, a senior economist at the Institute for Fiscal Studies, explains that the government has to manage a delicate balancing act between “not taxing people so much that they leave — or don’t come to — the UK, taking their tax payments with them . . . and getting more revenue from those who do stay”.
He suggests much of the policy debate has been around whether Labour’s plans “push the balance too far in one direction and risk an exodus, or the next generation not coming”. There are also issues of fairness at stake, such as whether UK inheritance tax should be levied on people who build up their wealth abroad and then die in the UK.
Adam also believes that there are “oddities” in the new approach. For example, allowing people in their first four years to live in the UK free of tax on foreign assets, but not free of tax on their UK wealth, could discourage them from bring money in and investing in the UK.
The four-year timeframe could also mean that non-doms stay in the UK only for a short period of time, to the detriment of economic activity. “At the moment, [the regime] encourages people to stay for 15 years,” says Shah at Blick Rothenberg, “but four years could make the UK more transient.”
He warns that such a regime could deter people from settling. “I think this would cost the economy a lot more because of the wealth, investment and businesses not coming here,” he explains. “Four years is too short, and the IHT cliff edge is a deterrent as the rate, at 40 per cent, is so high.”
Ritchie at RBC says that, while certain non-doms are likely to stay, such as those with a family and children in schools, there is a cohort of tech entrepreneurs that “Labour needs to be thoughtful about”. He believes the government needs to be encouraging “these people to come in, people who create jobs and wealth”.
For those who have already decided to leave, a number of countries across Europe and the Middle East are emerging as popular destinations. Ritchie cites Italy, Switzerland, France, Portugal and the UAE. “It’s countries that cater for safety and security, climate, lifestyle and tax,” he says. “If you get it right, you can prove attractive to high-net-worth individuals.”
Nevertheless, even some of these jurisdictions have recently tightened their tax regimes. Italy, for example, decided to double the annual flat tax on the foreign income of new residents to €200,000 in August. Portugal, meanwhile, closed its non-residents programme last year and launched a new system that is no longer available to individuals deriving an income from pensions.
Philippe Amarante, head of Middle East at Henley & Partners, a residence and citizenship advisory firm, says that “Dubai is really shooting the lights out” in attracting non-doms. He notes that this is largely because of its “attractive” tax regime, whereby individuals do not incur income or capital gains taxes, as well as the lifestyle and the “pro-business sentiment”.
9,500Number of millionaires that advisory firm Henley & Partners thinks will leave the UK this year
In all, these UK non-dom departures could contribute to an “unprecedented” net loss of 9,500 millionaires from Britain this year, according to Henley & Partners — more than double the number who left the country last year and second only to the number leaving China. Part of this overall exodus can been ascribed to “unwelcome policy decisions”, such as the ending of the non-dom tax regime, calculates Dr Hannah White, chief executive of the Institute for Government think-tank.
Rambourg makes clear that he will not be among the millionaires fleeing Britain this year — but he has left the door open for a future exit. “I’m still a French national and, maybe, I will eventually go back,” he muses.
“But I think it’s a duty to pay tax — I don’t choose the country I’m going to live in just because of the tax set-up. There are real non-doms out there, who are not obsessed by tax, and who plan to remain in the UK in spite of the disappearance of a tax perk.”
This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs and family offices, as well as alternative and impact investment