15 March 2024 by Stacy Lake

Overhaul of UK Non-Dom Tax Regime: Key Changes and Transitional Provisions

The Chancellor’s Spring Budget reverberated throughout the non-dom community, signalling the most substantial alterations to the non-dom tax regime in decades. Despite months of speculation about Labour’s own plans for non-doms, the Government unexpectedly abolished the non-dom tax regime effective from 6 April 2025.

The Current Non-Dom Tax System

In the UK, a “non-dom” refers to an individual domiciled outside the United Kingdom for tax purposes. Domicile, in this context, signifies the country an individual considers their permanent home or where they have their strongest connections. Under the existing regime, non-domiciled individuals (non-doms) can choose the remittance basis of taxation. This allows them to shield their non-UK income and gains from UK income and capital gains tax, provided such funds aren’t remitted to the UK. However, once a non-dom has been UK resident for at least 15 out of the previous 20 tax years, they are deemed domiciled in the UK and lose eligibility for the remittance basis of taxation.

Highly favoured among high net worth (HNW) and ultra-high net worth (UHNW) individuals relocating to the UK, persistent criticism has questioned why affluent foreigners receive such preferential tax treatment compared to UK domiciled people.

Proposed Changes

If the Budget proposals are enacted as announced, starting 6 April, 2025, the current tax framework for non-domiciled individuals in the UK will cease, rendering domicile irrelevant in determining tax status in the UK.

This will be replaced by a residence requirement: individuals who haven’t lived in the UK for the past 10 years will be eligible for a 4-year tax holiday from UK tax on their foreign income and gains.  UK domiciled people who weren’t UK resident for the last 10 years could also benefit from the rules for the first 4 years upon their return.  After residing in the UK for more than 4 years, both categories will be subject to UK tax on their worldwide income and gains.

Substantial changes to offshore trusts are proposed as well, with the removal of current income and capital gains tax benefits on protected trusts. The Government did, however, give some certainty to non-UK assets settled into trusts by non-domiciled individuals prior to becoming deemed domiciled in the UK and before 6 April 2025.  The Inheritance Tax (IHT) treatment of these trusts will not change, and they will remain outside the scope of UK IHT.

It is also proposed that Inheritance Tax will undergo significant changes, with foreign assets determined based on residence rather than domicile as it currently stands.  However, changes to the IHT rules are still under consultation.  It is suggested that the changes will see non-doms becoming subject to IHT on their worldwide income after 10 years of UK residence and will remain as such until having ceased residence for 10 years.

Transitional Rules

To mitigate the impact (and discourage mass exodus), the new rules include transitional provisions for non-doms already in the UK and past their first 4 years of residence.

For the initial two years, non-doms will be allowed to remit their foreign income and gains for a 12% flat rate tax.

Additionally, non-doms losing access to the remittance basis (but not eligible for the 4-year regime) will only be subject to UK tax on 50% of their foreign income for 2025/26.

For Capital Gains Tax purposes, non-doms losing access to the remittance basis will be able to rebase their overseas assets to their value as of April 2019, provided they are not yet deemed domiciled at 5 April 2025.

Foreign income and gains held within non-UK trust structures before 6 April 2025 and enjoying protected settlement status will remain untaxed unless matched with distributions or benefits provided to individuals who have been UK residents for more than four years.

Next Steps

In an election year, it’s worth noting that some of these changes could be shelved or altered depending on the outcome. Nevertheless, given the extent of the changes to the non-dom regime, it would be wise for all affected individuals to understand their future planning options as soon as possible.  For further advice, please contact our expert Wealth and Estate Planning team.

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