With less than a week to the budget, the chancellor is mulling whether to poach one of Labour’s headline policies and scrap non-dom status, which gives generous tax breaks to some of the UK’s wealthiest residents. Who would actually be affected, and what would happen if he went ahead?
Who are the non-doms?
Being “non-dom” means living in the UK but claiming that your permanent home (“domicile”) is abroad. Non-doms can live in the UK all year round, and may already have lived in the UK for several years. What matters for their tax is that they claim they plan to move to a different country eventually.
All sorts of people might be non-dom according to this definition: foreign students living in the UK for a few years, au pairs spending time learning English, the stereotypical “Polish plumber” with a family back home that they intend to return to. What makes non-dom status so controversial is that it comes with the ability to claim a special tax privilege: unlike the rest of us, non-doms don’t have to pay tax on investments they have abroad. When Labour or the government claim they are “abolishing non-dom status”, it is actually this tax break they are promising to get rid of.
Unlike the earlier examples, the people who benefit from this tax break are a very selected bunch. 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. Many of them work in finance, so that one in five of the highest earning bankers have at some point claimed non-dom status. In the richly paid oil industry, two out of five have benefited. The tax break is also used by top film stars and sports people. One in six of this group, with an average income of £2m each, have used non-dom status to reduce their tax bills.
Should the regime be scrapped?
There are a number of arguments made for why the non-dom tax break should be ended.
First, because the tax break is specifically for investments made abroad, it actually discourages wealthy people from investing in the UK. This is the opposite of what the UK needs, even more so in a recession.
Second, the tax break only goes to those who are intending to leave, or at least who make this claim. This discourages top talent from coming to the UK and settling here, since they lose eligibility.
Third, it seems unfair that while most UK residents pay tax on their incomes, whether made in the UK or abroad, non-doms get a special deal. That unfairness is made more stark by the fact that non-doms using the tax break are already very well-off.
Finally, at a time when public services are being squeezed, abolition of the tax break could raise much-needed revenue.
How much would be raised by abolition?
The best estimate of how much would be raised by complete abolition of the tax break in 2024 is £3.8bn, according to our calculations for the CAGE research centre at the University of Warwick. This is even after accounting for the fact that abolition would lead non-doms to change their behaviour in various ways to reduce their tax bills.
However, there are reasons we still might want some transitional arrangement in place. A new arrival from, say, Germany, might a couple of years later want to sell their German house and settle down permanently in the UK. It would be hard to justify why the UK should apply capital gains tax to that house for the full 30 years she has owned it, rather than the two years she has spent in the UK.
We might therefore want some arrangement that allows new arrivals to reorganise their affairs to reflect their new life in the UK. Any arrangement should be strictly time-limited, but it would naturally reduce some of the revenue that was raised.
A regime that provided an exemption for the first two years could still raise £3.2bn.
Would the high earners leave?
We can learn about this from our past experience. The UK actually added restrictions to the regime in 2017. For those that were affected this reduced their post-tax incomes by almost a fifth, so if everyone was going to flee, this would have been the time to do it.
What we saw was that a few people did leave, but the numbers were relatively small. In any given year, about 5% of people affected by the reform would be expected to leave anyway, because this group is pretty mobile. The reform increased this to 10%.
A natural concern is that even this small rate of leaving could cost serious money. For the leavers, we not only miss out on the new tax we wanted, we also lose the tax they were already paying. However, the striking thing about the people who left in response to the tax reform is that they were the ones who were paying the least tax anyway, so it actually doesn’t cost much to lose them.
The vast majority of non-doms are actually in the UK to work, and are making very high incomes, be that as bankers, footballers or CEOs. These jobs pay a lot in the UK, more than they would get elsewhere, and so for most non-doms it isn’t financially sensible for these people to leave. Leaving also means they would miss out on the UK’s “vibrant economic climate” and cultural scene, which many of them value.
Arun Advani is an associate professor of economics at the University of Warwick and a research fellow at the Institute for Fiscal Studies.
