The Finance Bill will create a punitive and arbitrary set of rules for non-doms, under which they could end up paying exorbitant levels of tax, says James Lawson
This year’s Spring Statement was a pretty no-nonsense affair – and with good reason. As the war in Ukraine rages on, Trump’s tariffs begin to bite and the OBR slashes our growth forecast in half, the Chancellor has promised to “restore stability to our public finances”.
Yet even as the government makes the right noises on house building, civil service cuts and welfare reform, the looming abolition of the non-dom status threatens to undermine its efforts.
These plans are already driving wealth-creators away. More than 10,000 millionaires, who are contributing a disproportionate amount of tax and business activity, left the UK last year.
But after extensive consultation with legal experts and financial advisors, the situation appears to be even worse than we anticipated. The Finance Bill will create a punitive and arbitrary set of rules for non-doms, under which they could end up paying exorbitant levels of tax.
Let’s look at how the new regime will treat non-doms’ overseas businesses. Historically, non-doms have been shielded from having their profits from their foreign companies taxed as though it is personal income. But this Bill is going to scrap these safeguards. In the worst case scenario, non-doms could have to pay 45 per cent tax on their overseas profits, and 39.5 per cent tax on dividends – an effective tax rate of 67 per cent.
A non-dom ricking time bomb
The magnitude of this shift cannot be overstated. Non-doms would be charged taxes on sums which vastly exceed their actual income. Such punitive taxation runs contrary to the UK’s proud history as a champion of commerce and competition.
But the problems don’t end there. The Temporary Repatriation Facility (TRF) is worryingly unclear. It’s designed to offer a reduced tax rate for offshore income and capital gains brought into the UK for three years. But there are fears that HMRC’s tax avoidance rules might still apply, undermining the scheme’s intended purpose.
This is because, by default, HMRC views the 45 per cent income tax rate as standard, with lower rates treated as concessions which they can override using anti-avoidance mechanisms. It has not been made clear how HMRC’s rules will interact with the TRF. Many non-doms will be understandably concerned that HMRC will be able to arbitrarily levy these additional rates of taxation, despite the implicit promise of the lower rate under the TRF. HMRC won over 90 per cent of appeals in 2023. Even if non-doms had the time, money or inclination to fight, their chances of successfully disputing this are low.
Such punitive taxation runs contrary to the UK’s proud history as a champion of commerce and competition
This is a ticking time bomb. It is likely many of our wealth-creators will already be fleeing to countries like Italy and the UAE, who are actively incentivising them to live there. This will be a catastrophe for the economy. The government has assumed that the abolition of the non-dom regime will raise over £12bn. But it could, if anything, lose money, creating a black hole in Britain’s finances.
This requires urgent attention. The government must amend the Finance Bill, and preserve the safeguards that stop existing non-doms from facing an eye-watering 67 per cent tax rate. It also must guarantee that any income or capital gains repatriated under the TRF will not be subject to additional taxation.
We should obviously aspire to much more than damage control. We shouldn’t just be clinging on to existing wealth, we should be actively encouraging more of it to our shores, whether it be through simplifying our tax system, or offering an Italian-style flat fee. This approach would align the interests of the UK and non-doms, boosting both economic growth in the process.
But the new rules are coming into force in just three days. If the government fails to fix this Bill, the trickle of wealth-creators leaving will soon become a flood – and the economic impacts will be felt by every single Brit.
James Lawson is chairman of the Adam Smith Institute