End of non-dom regime: Radical reform of the UK taxation of international individuals
Introduction
It is the end of the non-dom regime as we know it.
A fundamental change on how international individuals are taxed in the UK was announced on 6 March 2024 at the Spring Budget.
The proposals will affect those individuals who are not UK domiciled (so called ‘non-doms’) but are resident or considering becoming resident in the UK. It will also impact non-UK trusts that have or will have UK resident settlors and/or beneficiaries.
It is imperative that those affected seek expert advice. We have outlined the proposals below.
Foreign income and gains regime: Proposals affecting individuals
From 6 April 2025, the remittance basis of taxation will be abolished and replaced by the foreign income and gain regime (“FIG regime”).
The FIG regime is simpler however, individuals will be subject to tax on worldwide income and gains (“arising basis”) sooner than under the current rules. Residence is key to the new regime and so it is vitally important individuals understand when they are UK tax resident.
Summary of the old and new regime
|
Existing remittance basis regime |
New foreign income and gains regime |
|
|
Eligibility to access regime |
Non-dom. |
Based on residence not domicile. Not UK resident for at least 10 years. |
|
Length of time that regime can be accessed |
Up to 15 years of UK residency. Arising basis of taxation after that i.e. worldwide income and gains subject to UK tax. |
First 4 years of UK residency (if non-UK resident for at least 10 years before that). Arising basis of taxation after that i.e. worldwide income and gains subject to UK tax. |
|
Basis of taxation under regime |
UK source income and gains subject to UK tax. Foreign income and gains not subject to UK tax unless brought (‘remitted’) to the UK. |
Worldwide income and gains exempt from UK tax. |
Transitional Provisions
To soften the impact on those non-dom individuals currently resident in the UK claiming the remittance basis of taxation, there are some transitional provisions.
Assets held personally can be rebased to the value at 5 April 2019 for disposals made after 5 April 2025.
For the tax year beginning 6 April 2025, those who move from the remittance basis to the arising basis will be subject to tax on 50% of their non-UK income. This does not apply to gains or assets held on trust.
Foreign income and gains that arose during a period of UK residence before 6 April 2025 that are brought into the UK for the next 2 tax years will be subject to tax at a special low rate of 12%.
When we have more details, it is important for those currently on the remittance basis to seek advice on planning.
Foreign income and gains regime: Proposals affecting trusts
Abolition to protected settlements
Non-UK trusts established by non-dom settlors which are settlor interested can benefit from the ‘protected’ trust regime. The protections effectively mean that foreign income and most gains can roll up in the trust free from UK tax. The income and gains are only potentially taxable when UK resident settlors or beneficiaries receive a benefit.
The protections will be abolished so that trust income and gains will be taxed on a UK resident settlor who is not eligible to be taxed on the FIG regime.
Onward Gifting
Onward gifting rules will be modified, although we do not have details as yet.
Inheritance Tax
Inheritance tax (“IHT”) is a concern for many given it is levied at a rate of 40%. Changes were announced to move IHT to be based on residence rather than domicile from 6 April 2025.
The Government will publish consultation documents on the IHT reforms but have provided some details.
Summary of the old and new regime
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Current regime |
New regime |
|
|
Personally held assets |
Non-doms only subject to IHT on UK assets for first 15 years of UK residence. After 15 years UK residence worldwide assets subject to IHT. IHT tail so worldwide assets will remain subject to IHT for 4 years assuming they do not return before 6 complete years of non-UK residence. |
IHT on UK assets only for first 10 years of UK residence. After 10 years of residence worldwide assets subject to IHT. IHT tail so worldwide assets will remain subject to IHT for 10 years after 10 years UK residence. |
|
Assets held in trust |
Non-UK assets settled by non-dom within first 15 years of UK residence not subject to IHT. |
IHT treatment will depend on residence criteria and tail provisions when settled and/or 10 year anniversaries. |
Providing some reassurance, the Government has said IHT status of trusts established before 6 April 2025 will be not be affected by any new rules meaning those not deemed domiciled might consider establishing trusts soon. Having said this, it remains to be seen if the legislation enacted includes this reassurance.
What is next
- We await draft legislation for more details. It is worth noting that there will be a General Election before 6 April 2025, when the proposed changes will be introduced.
- The Labour Party, the opposition, has said it would abolish the non-dom regime. It remains to be seen, if the Labour Party form the new Government, whether they will simply implement these proposals.
- We will provide further details when we have draft legislation, consultation documents and any response from Labour on the proposals.
What does this all mean?
- The proposed changes, if they are enacted as announced, will make UK residence the key to taxation of international people in the UK.
- It will reduce the time that they can be resident in the UK before becoming subject to tax on a worldwide basis.
- It also changes the tax profile of non-UK trusts where they have UK resident settlors and/or beneficiaries.
- The changes will require a substantial rethink as to how to structure wealth for international people resident in the UK.
Next steps
It is important for those people spending some time in the UK to ensure they understand if and when they became UK resident. This will enable them to determine if and how the new proposals will affect them and any planning needed as and when we get more details about the proposals.
It is the end of the non-dom regime as we know it. The proposals will mean that non-doms resident in the UK will be subject to UK tax on their worldwide assets sooner than under the current system.
Please email Hilesh Chavda to ensure we keep you updated with latest analysis or if you would like to discuss your UK tax residence.
