Non-dom changes

Headlines

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• Individuals who are resident but not domiciled in the UK can currently benefit from the remittance basis for their first fifteen years of UK residence.? This means that they do not pay UK tax on non-UK income and gains unless remitted to the UK.

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• From 6 April 2025, this will be abolished.? Domicile will cease to be a relevant factor and a new regime, based on residence only, will be introduced.? This new 4-year regime will exempt foreign income and gains (“FIG”) from UK tax for individuals who have been resident outside of the UK for a period of at least 10 years, where a claim is made. ?This will apply equally to UK domiciled individuals who are long-term non-UK residents, if they return to the UK.

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• During the four year period, qualifying individuals will not be taxed in the UK on FIG, whether it is remitted to the UK or not.? There will be no need to segregate or trace funds during this period.? Similarly distributions from non-UK resident trusts will be tax-free.

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• FIG arising to non-UK settlor-interested trusts, including those already in existence, will be taxable on settlors who do not benefit from the 4-year regime.

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Trusts

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• Non-doms that settle non-UK trusts currently benefit from indefinite deferral on FIG arising to non-UK trusts (the “protected trust” regime), until they receive a benefit and provided they remain domiciled outside of the UK.?

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• This will be removed for all non-doms that are not within the 4-year FIG regime, including on existing trusts.? From 6 April 2025 FIG arising to non-UK trusts will be taxed on the settlor/transferor on the arising basis (subject to any available reliefs).

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• Trusts settled before April 2025 by non-doms are still effective for UK IHT mitigation on non-UK property.

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Inheritance tax

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• Inheritance tax (IHT), which is currently based on domicile, will also move to a residence based test.? This is acknowledged as a complex area and heavily caveated as being subject to consultation.

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• Non-UK assets settled onto non-UK trusts before 6 April 2025 will continue to be excluded property (outside the scope of UK IHT) even after the rules are changed.

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• Individuals will be subject to worldwide IHT on personally held assets when they have been resident in the UK for 10 years.? Subject to consultation, it appears that there will be a 10 residence year “tail” on being within the UK IHT net, regardless of domicile.?

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Transitional rules

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Individuals who currently benefit from the remittance basis but will not qualify for the 4-year FIG regime will receive some transitional benefits:

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• They will be taxed on only 50% of their foreign income during 2025/26 only.

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• There will be a two year window from 6 April 2025 during which time they may remit pre-April 25 FIG to the UK (by election) pay tax at a reduced rate of 12%.

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• Non-UK assets held at 5 April 2019 will be rebased to their market value on that date.

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Our thoughts

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• There will be an election before April 2025.? How Labour responds to these proposals will be interesting. Whether, if they win the election, this will be too far down the line to redirect/change remains to be seen.

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• Removal of the protected trust regime, including for existing trusts, will mean affected individuals need to undertake a comprehensive review of their structures before 6 April 2025.

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• Tax free remittances during the 4-year FIG window will eliminate the need for bank account structuring, tracing and derivation rules for inbound UK residents.? Similarly, the 12% reduced transitional rate will simplify matters during that two year window.

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• The rules appear to be beneficial to individuals with a UK domicile of origin who have been resident out of the UK for a long period of time, where currently it is difficult to get certainty on their domicile, and therefore IHT, position.

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• The motive defence from transfer of assets abroad rules will be back in the spotlight where individuals have settled trusts that invest via underlying entities.

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• Migration of companies to the UK may become more attractive.