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  1. Comment
12 March 2024

The abolition of non-dom status is murkier than it looks

However political Jeremy Hunt’s announcement was, it is a major step in the right direction.

By Arun Advani, David Burgherr and Andy Summers

In 2022, while running for leadership of the Conservative Party, Jeremy Hunt promised to repeal the ban on fox hunting. Last week he shot Labour’s fox.

Labour announced in 2022 that it would abolish non-dom tax status. This colonial-era tax break allows wealthy foreigners to live full-time in the UK while avoiding tax on money they invested abroad. Using the evidence from our research, Labour promised a more modern regime for supporting new arrivals to the UK, and said this would raise more than £2.3bn, to be spent on primary school breakfast clubs and nurses.

Pre-empting this plan, Chancellor Jeremy Hunt announced that he was abolishing non-dom tax status. The move was a mixture of politics and pragmatism. Politics, because by announcing abolition now he has left Labour scrabbling for some other way to raise money for their spending priorities. Pragmatism, because if the reform were coming anyway, this allowed him to set the design and claim the revenue raised for his own political priorities.

The reform he put forward almost entirely apes what Labour were expected to do. Domicile – a concept that depends on a taxpayer’s unknown intentions – is replaced by tax residence, the same type of test as is used by other countries. The new regime also provides a more limited tax break, lasting only the first four years, rather than 15 years as currently. This gives new arrivals time to settle into the UK and sort out their foreign investments before UK tax is applied on that wealth.

While the reform got these important basic structural things right, it missed a trick by continuing to give a tax break only for investments made abroad. This continues to discourage wealthy foreigners who come to the UK from investing here, since they would have to pay tax on any UK investments. Exempting these investments would cost little, but would encourage those who do come here to bring their wealth onshore, and to get more engaged in the wider economy.

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The biggest risk at this stage is the lobbying that will surely be taking place. Many who stand to lose – including tax advisers with a career built on arguing why a taxpayer is not domiciled here – will be making the case for special reliefs and carve-outs.

The announced reform already contains some of these. Capital gains made before 2019 will be exempted from tax, even if the non-dom has been living here more than a decade. The announcement that the reform won’t be implemented until April 2025 also allows non-doms to get their money into a trust, to permanently avoid inheritance tax. Both are hard to justify rationally, and should be scrapped. Avoiding additional loopholes being added is even more important, as most will seem innocuous but some will inevitably be heavily abused and just require further reforms and uncertainty in a few years’ time.

Aside from the partisan politics of whose idea it was, and which chancellor gets to spend the money, last week’s announcement should be cheered as a major, if belated, step in the right direction. Both major parties are in alignment over how a regime for new arrivals should be structured, and that regime is well-supported by academic evidence. Both parties now need to resist behind-the-scenes attempts to water down reform now that the big announcement has been made.

[See also: Jeremy Hunt’s disgraceful scorched earth budget]

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