The end of the non-dom regime
Far-reaching tax reforms for non-domiciles were announced as part of the Spring Budget this week. Our Tax Director, Kieron Clement-Smith, highlights the key points for new and existing non-doms, how and when the new rules will be introduced, and early actions to consider.
What was announced?
The Chancellor has unveiled his plans for the current non-domicile (non-dom) tax system from April 2025, introducing a “transitional resident” model similar to that of New Zealand.
Currently, non-UK domiciliaries who are UK resident can opt to use the remittance basis of taxation for 15 years. This means that whilst they pay tax on their UK income and gains in the same way as UK domiciliaries, they pay tax on their foreign income or gains (FIGs) only when they are remitted, (i.e. brought) to the UK, either directly or indirectly.
Under the new framework, individuals who have been non-UK resident for ten years will have a four-year exemption period for non-UK income and gains, after which individuals will pay UK tax on their worldwide income and gains (as is the case for domiciled UK residents).
Our summary of the key points:
The new regime
The remittance basis will be replaced by a favourable taxation system for new UK tax residents. For individuals who have been non-UK resident for the past 10 years they will receive a full tax exemption on FIGs brought to the UK in the first four years of UK residency. This will also be available for existing non-UK domiciliaries who have been resident in the UK for less than four years as of April 2025. Additionally, the ‘Overseas Workday Relief’ system, which non-UK domiciles are eligible to claim during their first three years of UK residence, will be retained and simplified.
Transitional provisions
The existing remittance basis system for non-UK domiciled individuals will cease on 6 April 2025, however, transitional rules will be introduced for existing non-domiciliaries to help reduce the impact of these changes:
- A 50% reduction in the tax rate on foreign income for individuals transitioning out of the remittance basis during the 2025/26 tax year. Note that this will not apply to foreign gains.
- Re-basing of foreign capital assets to their 5 April 2019 values.
- For those who have previously been taxed on the remittance basis, historic foreign income and gains (not yet remitted to the UK) will be taxed at a reduced rate of 12%, if transferred to the UK between 6 April 2025 and 5 April 2027, under the ‘Temporary Repatriation Facility’.
Non-UK trusts
The existing ‘protected trust’ regime will cease on 6 April 2025, so income and gains of settlor-interested offshore trusts will be attributed to a UK resident settlor.
However, it was announced that ‘excluded property’ trusts established prior to 5 April 2025 will continue to offer inheritance tax (IHT) protection in perpetuity (provided that certain conditions are met).
FIGs that arise in protected non-UK trusts before 6 April 2025 will not be taxed unless distributions or benefits are paid to UK residents who have been in the UK for more than four years.
Consultation and IHT reform
The government will invite consultation feedback on changing the Inheritance Tax (IHT) regime to a residence-based system. Under the current system, no inheritance tax is due on the non-UK assets of non-UK domiciliaries until they have been UK resident for 15 out of the past 20 tax years. The current plan is that it will require ten years of UK tax residence for worldwide assets to fall within the scope of IHT. There will be a ten-year ‘tail’ for those leaving the UK (which is likely to be of great interest to British expatriates).
Although alterations will not take effect until at least 6 April 2025, to provide further surety, the government has confirmed that the IHT status of non-UK situs assets settled into trust by non-UK domiciliaries prior to 6 April 2025, will remain unchanged (broadly full protection from IHT forever), so we anticipate a large number of offshore trusts will be established by wealthy international families in the run up to this date.
Our view
Whilst the new regime simplifies the tax landscape for new UK arrivals and encourages foreign funds into the UK, having a relatively short preferential tax window may persuade fewer individuals to relocate to the UK on a longer-term basis, and residence planning will become even more important.
If Labour do win the general election, we cannot see them repealing these rules, as they have long called for change to the non-dom regime.
Whilst we await further detail on these proposals, particularly on the IHT reforms, we are advising our non-UK domiciled clients to take early action to consider their options ahead of 6 April 2025 and we will provide further updates in due course.
For further information about the Spring Budget announcements or to discuss any of the issues raised, please contact Kieron Clement-Smith.
This material is published for the information of clients and contacts. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or SRLV LLP.