End of the "Non-Dom" Regime

The upcoming changes, effective April 2025, introduce a four-year tax relief window for new arrivals and short-term residents. Existing residents face increased taxation on foreign income and gains, although transitional measures aim to ease the transition.

The UK's non-domiciled (non-dom) tax regime has historically been a magnet for affluent foreign individuals looking to mitigate their tax obligations. However, recent years have witnessed a series of significant revisions, which have somewhat tarnished its attractiveness. With the introduction of new charges and stricter regulations, the tax landscape has undergone a substantial transformation.

A non-dom or "non-domiciled", is a term used in the UK tax context to refer to individuals who are tax resident in the UK but whose "domicile" (tax or legal domicile) is not in the UK. In other words, they are individuals who do not consider the UK to be their permanent or principal home, although they may reside there temporarily or on a recurring basis for personal or professional reasons. This tax status allows them, in certain circumstances, to avoid or reduce tax on income and gains earned outside the UK, provided they are not remitted to the UK.

Previously, individuals who had been resident in the UK for at least seven of the previous nine tax years were subject to a charge of ￡30,000, while those resident for at least 12 of the previous 14 tax years faced a higher charge of ￡60,000. However, since 2017, amendments to the non-dom rules dictate that individuals lose this status if they have been resident in the UK for 15 of the previous 20 years or meet specific criteria, including being born in the UK, having a domicile of origin in the UK, and residing in the UK for at least one year since 2017.

Nevertheless, the transition towards a residency-based tax regime in the UK signifies a significant shift in policy. Under this new framework, residents of more than four years will now be liable to pay taxes on their new foreign income or gains. Despite the expected revenue increase of ￡2.7 billion annually by 2028, the government has implemented measures to facilitate adjustment. Newcomers and individuals with less than four years of residency will benefit from tax exemptions during an initial period. Also, temporary tax reductions, revaluations of capital assets, and provisions for the repatriation of foreign income. Overall, while the changes to the non-dom tax regime aim to bolster government revenue, their full impact on migration patterns and investment dynamics remains to be seen.

The repercussions of these changes on non-dom migration and investment remain uncertain. Although the government anticipates a notable boost in revenue, concerns linger about potential disincentives for prospective residents and investors. Comparative analyses with jurisdictions such as Italy and Spain are becoming increasingly relevant in this context.

Special Impact on non- resident Trusts

Starting from April 2025, individuals who do not meet the criteria for the four-year Foreign Income and Gains regime will lose the exemption from taxation on income and gains generated within settlor-interested trust arrangements. Instead, any Foreign Income and Gains generated within these trusts will be subject to taxation on the UK resident settlor or transferor as it arises. However, any FIG generated before April 6, 2025, will still be taxed based on worldwide distribution.

Switzerland as an option?

What about alternative jurisdictions for non-domiciled individuals? Switzerland is emerging as a prominent choice in this landscape, alongside destinations like Monaco and Italy.

Switzerland, mainly offers two main tax routes:

• Lump Sum Tax Regime: This special regime, available in most cantons, is for non-Swiss nationals who don't work in Switzerland. Taxes are based on living expenses rather than global income and assets, with factors like rent for Swiss primary residence considered. Benefits include reduced Swiss income and net wealth taxes on foreign assets and income, while retaining asset disposal rights for life.
• Ordinary Tax Regime: Some cantons offer attractive tax rates, with maximum income tax rates around 20% to 22%. Gains from private movable asset disposals are often exempt. Various tax planning options are available, especially in cross-border scenarios, including reorganizations and asset structuring for tax efficiency.

Regarding gift and inheritance taxes, some cantons have no gift or inheritance tax at all, which may be interesting for individuals that want to transfer their wealth.