UK: Non-doms no more?

In summary, the Budget proposals are set to abolish the current remittance basis of taxation for non-UK domiciled individuals, replacing it with a residence-based regime.

Individuals who opt into the new regime will not pay UK tax on any foreign income and gains (the new foreign income and gains (FIG) regime) arising in their first four years of tax residence, provided they have been non-tax resident for the last 10 years. Anyone who has been tax resident in the UK for more than four years will pay UK tax on their foreign income and gains.

The Government will also introduce transitional arrangements for existing non-UK domiciled individuals claiming the remittance basis, including an option to rebase the value of capital assets to 5 April 2019 and a temporary 50% exemption for the taxation of foreign income for the first year of the new regime (2025/26).

A two-year Temporary Repatriation Facility (TRF), to bring previously accrued foreign income and gains into the UK at a tax rate of 12%, will also be introduced alongside a plan to reform Overseas Workday Relief for employment duties carried out overseas.

Inheritance Tax (IHT), meanwhile, is currently a domicile-based system. The Government announced its intention to move to a residence-based system, subject to consultation, but no changes to IHT will take effect before 6 April 2025. An individual’s worldwide estate will be subject to IHT once they have been resident in the UK for 10 years. This will continue to be the case for 10 years after ceasing to be UK tax resident (the 10-year tail).

The current IHT treatment will continue for any non-UK property that is settled by a non-UK domiciled settlor and becomes comprised in a settlement prior to 6 April 2025. New trusts and additions to existing trusts made by a non-UK domiciled settlor on or after 6 April 2025 will be subject to new residence-based rules.

Trusts

The protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the new four-year FIG regime. FIG, arising in the trust (whenever established) from 6 April 2025, will be taxed on the settlor on the same basis as UK domiciled settlors at present, unless the settlor is eligible for the new four-year FIG regime. 

The matching of pre-6 April 2025 FIG to trust distributions will continue, but UK resident non-domiciled individuals will no longer be entitled to the remittance basis, in respect of worldwide trust distributions. Beneficiaries and settlors, who are within the four-year FIG regime, will also be able to receive benefits from 6 April 2025, free from any UK tax charges, no matter whether the benefits are received in the UK or not. However, such benefits are not matched to trust income and gains and will be subject to a modified onwards gift rule.

For long-term resident non-doms, the proposals present significant challenges and an increased tax burden, but there may be an opportunity to settle offshore assets into a non-UK trust before April 2025, to shelter those assets from IHT at 40%.

For short-term residents and non-residents looking to realise significant value (for example, a business sale, substantial dividends or trust appointments), the four-year FIG regime would make the UK an extremely attractive jurisdiction.

However, the proposals create as many questions as they answer. We have yet to see any draft legislation and it is likely that the next Government, rather than the current one, will oversee any changes to the regime. We expect a General Election later this year, and by January 2025 at the absolute latest. Without pre-empting the result of the election, we must consider now both Conservative and Labour policy on these issues.

Labour’s plans

Having had her thunder stolen by the March Budget, the Shadow Chancellor, Rachel Reeves, has more recently announced Labour’s plans to raise further tax by “closing the loopholes in the Conservatives’ non-dom plan”. The key Labour Party counter-proposals include that all foreign assets held in a trust should fall within the scope of UK IHT, whenever they were settled. This counters the Budget statement that “the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change.”

Labour’s plans also do not include a 50% discount on the taxation of foreign income for the first year of the new regime (2025/26). The plans do include a consideration of whether there should be an investment incentive during the four-year arrival window, so that UK investment income is free of UK tax and not disincentivised when compared to investment elsewhere in the world.

So, now what?

The only real certainties are uncertainties, though there are also now several new acronyms to remember. The announcements of the proposed changes do at least give us a direction of travel, but it is very difficult to assess the options available for affected clients, whether they are already UK resident or considering coming to the UK.  The non-dom regime has become complex and unwieldy and, as always, efforts to simplify it are welcome provided they are fair and practical. 

But the current uncertainty has already driven some non-doms to decide to leave the UK before 5 April 2025, and to live elsewhere. If a large number decide to leave, where would this leave the tax gap? This has long been the focus of debate regarding the non-dom regime.

Ultimately, as is inevitably the case with a fundamental change to the tax system, there will be winners and losers: opportunities for some and more UK tax for others. For now, however, all we and indeed any professional can do is communicate what we do know to clients and highlight all the uncertainties. That is hardly an ideal state of affairs, as taxpayers must be given certainty and time to plan. 

We eagerly await confirmation of the date of the IHT consultation and, more importantly, the General Election, with a view to when we might see some legislation and certainty. In the meantime, watch this space…