Could Cyprus benefit if the UK abolishes its non-doms tax regime?

After years of cuts to their special tax privileges, people who live in Britain but do not have to be domiciled there for tax purposes now face the threat of this regime ending altogether if the Labour party comes into power next year; and Cyprus could stand to benefit if it plays its cards right.

According to local experts, if the UK’s special tax regime for these individuals – more commonly referred to as non-doms – is abolished, these same individuals will be on the search for new destinations with their own special tax regimes. And Cyprus could be the ideal candidate.

The opposition Labour party is polling strongly in advance of the next general election and has pledged to scrap the system if elected. With the next general election due to take place by January 2025, speculation is rife as to whether significant reforms will be made to the UK tax regime.

Costas A. Markides, Board Member, International Tax and Corporate Services, at KPMG Cyprus, explained:

“If they abolish it, Cyprus may benefit and we should highlight our own incentives. This may be an opportunity for Cyprus in terms of attracting a group of investors that wishes to leave London.”

To approach them successfully, he added, “we must showcase the Cyprus Non-Dom Regime that we have in place”.

Non-domiciled residents are individuals who live in the UK (have their residence in the UK), but claim tax on their permanent place of residence abroad. Simply put, these individuals do not have to pay UK tax rates on their foreign income.

The Labour Party has pledged to replace the current non-dom tax regime and introduce a shorter-term scheme for temporary visitors to the UK. No details have been given on the operation of this scheme, although it’s possible that they would look at other jurisdictions for inspiration.

Reforms of this nature could result in those who currently benefit from non-dom status becoming subject to UK income tax, capital gains tax and inheritance tax on their worldwide assets much sooner than expected.

When it comes to the taxation of non-doms in the UK, the Conservative Party has shown a more favourable attitude to the application of the remittance basis. However, the Conservative government have not ruled out the possibility of reform and are facing significant pressure from the opposition to review the benefits of the current regime.

In light of the uncertainty surrounding the UK tax regime, many individuals are considering the option of relocating to another jurisdiction.

Nearly 70,000 non-doms now face decisions about what to do in the event of a Labour electoral victory. The choices they make could have wide repercussions for the UK’s tax revenue and international competitiveness. As well as super-rich business owners and heirs, non-doms also include City of London bankers, lawyers and consultants. Those living off unearned income are far outnumbered by non-doms who work, according to research based on tax records.

According to a report in the Financial Times, while net migration to the UK hit record highs last year, some finance industry experts worry about the UK’s ability to attract the very well-off, particularly in the face of increased international competition for their wealth. “Several countries in the past couple of decades have sought to copy the UK’s non-dom system and introduced tax privileged systems for wealthy foreigners, including Portugal, Italy, Spain, Greece, Malta and Cyprus,” the FT said.