Non-dom tax status: what is it and how is it changing?

The term “non-dom” is short for non-domiciled, and in Britain relates to someone who lives in the UK, but whose permanent residence for tax purposes is registered abroad.

The changes set out in Labour’s Budget – intending to remove domicile status from the UK tax system from April 2025 – would have reduced the tax breaks enjoyed by the country’s non-doms, but recent reports suggest they will be watered down.

Here, Telegraph Money explains what the non-dom tax rules are currently, what’s due to change, and how you might be affected. This guide will cover:

• What is a non-dom?
• Why are non-doms controversial?
• What does being a non-dom mean for tax?
• How are the non-dom rules changing?

What is a non-dom?

A “non-dom” is a UK citizen whose permanent residence is registered abroad.

They only have to pay UK tax on the money they earn here in the UK – so they aren’t taxed on earnings made overseas, which in many cases will be substantial.

The special tax treatment is not available to ordinary UK taxpayers, even though the non-doms may spend most of their time in the UK and have lived here for several years.

Why are non-doms controversial?

Non-doms have long been a source of contention because while the generous tax breaks are entirely legal they predominantly benefit wealthy foreigners.

One in five bankers were reported to be non-doms in 2022, according to the London School of Economics, and four in 10 individuals who earned £5m or more in 2018 had claimed non-dom status at some point.

However, supporters of the regime argue that non-doms should be allowed to retain the tax relief, as having these wealthy individuals in Britain comes with benefits.

If the Government abolishes the regime it could cost the UK £6.5bn by 2035, and 23,000 jobs by 2030, according to the Adam Smith Institute. This would be due to lower investment, a drop in tax revenue, reduced consumption, and a resulting loss of jobs.

What does being a non-dom mean for tax?

Non-doms can make significant tax savings, as they do not have to cough up income tax or capital gains tax on investments and other assets held overseas.

They also benefit significantly from potential inheritance tax savings (IHT). While a normal UK resident’s worldwide estate is subject to 40pc taxation after £325,000 (plus an extra allowance for family homes), a non-dom is only taxed on their UK assets, so their assets held abroad are immune to the UK’s hefty death duties.

Non-doms must pay UK tax on foreign income and foreign gains if and when they are brought (or remitted) to UK accounts.

How do you become a non-dom?

A non-dom must demonstrate to HM Revenue and Customs that their domicile (permanent home) is in another country.

Your domicile is usually the country your father considered his permanent home when you were born, so it’s not necessarily related to your nationality or country of birth. This has led to the situation of somebody living in the UK for virtually their entire life but maintaining an overseas domicile as their father lived abroad when they were born.

If you were born in the UK, you are likely to start off with a UK domicile and losing it is difficult.

However, it may be possible, particularly where people retire to another country with no intention of returning to the UK. The law surrounding this area is complex, so if you’re planning on trying to gauge whether your overseas move can open the door to non-dom status, it’s best to speak to a regulated financial adviser.

How long can you live in the UK with non-dom status?

While non-doms can currently reap the rewards of special tax treatment, the benefits are not forever immune to UK taxation. Essentially, the perks begin to be eroded after seven years, before disappearing entirely after 15 years.

Non-doms have to pay a £30,000 annual “remittance charge” after being resident in the UK for seven of the previous nine tax years. This rises to £60,000 after being resident for 12 of the past 14 tax years.

In 2017 the rules were changed, so that someone who has lived in the UK for at least 15 of the past 20 years automatically becomes domiciled in the UK – and they lose their non-dom status. As a result of this, the number of non-doms in the UK has plummeted from 85,000 to 55,000 since 2017, as shown in the graph below.

How are the non-dom rules changing?

The previous Conservative government introduced the plans to change the generous tax breaks for non-domiciled individuals in its 2024 Budget. Labour has since committed to continuing the plans – going a step further to close a “loophole” that allows non-doms to move money into an offshore trust before the ban comes into place in April 2025.

In its public spending audit, the Government said it intended to remove the concept of “domicile status” from the tax system from April 2025 and replaced with “a new internationally competitive residence-based regime”.

From April, new arrivals to the UK should expect to pay the same tax as everyone else after four years. New arrivals to the UK will receive 100pc tax relief on their foreign income and gains for their first four years of tax residence, as long as they have been non-resident for the past 10 years.

However, due to the exodus of millionaires from Britain, Chancellor Rachel Reeves has prepared an amendment to the Finance Bill that will make it easier for non-doms to bring money instantly to the UK.

To help transition to the new rules, there will be a Temporary Repatriation Facility (TRF), so people can bring pre-April 2025 foreign income and gains held offshore into the UK at a reduced rate of tax.

How much tax will be recouped through abolishing the non-dom tax regime?

The tax raid is projected to generate £2.5bn a year for the next five years, according to figures from the Office for Budget Responsibility.

However, Telegraph analysis found that Labour’s crackdown on non-doms will bring in just £8,000 per person, raising the possibility that it may cost more than it raises, should wealth be driven away from Britain.

The chart below shows how much tax the Treasury has taken from non-doms claiming the “remittance basis”.

According to HMRC, only 55,200 taxpayers claimed to be non-domiciled in 2022, representing 0.08pc of the UK population.

Of these, 37,000 non-doms claiming the “remittance basis” paid over £6bn in tax in 2020-21.