UK Resident, non-domiciled - Will they leave?

Blog – 16 July 2024

Income Tax and Capital Gains Tax

In the 2024 Spring Budget (the last delivered by a Conservative Government) the Chancellor announced the abolition of the of the UK tax regime linked to those who are UK resident but not domiciled in the UK.

Very broadly the regime permits those who have been in the UK for seven out of the past nine years to avoid tax on overseas income and gains by paying a penalty (remittance-based charge) of ￡30,000. This increases to ￡60,000 for those UK resident in twelve out of the last fourteen years. After fifteen years of UK residence, they are liable to tax on worldwide income.

Labour wanted to scrap the current rules, but the Conservative government argued that the regime encouraged wealthy individuals to come and remain in the UK. It was therefore a surprise that Jeremy Hunt announced the abolition of the UK resident non domiciled tax regime and its replacement with a regime very similar to the one that the Labour party proposed.

It was announced that from April 2025 new arrivals into the UK will not be required to pay any tax on foreign income and gains in the first four years of their UK residence. After four years those who continue to live in the UK will pay the same tax as other UK residents.

Hunt said: “We [the government] will put in place transitional arrangements for those benefiting from the current regime. That will include a two-year period in which individuals will be encouraged to bring wealth earned overseas so that it can be spent and invested here in the UK.

According to Hunt, abolishing non-dom status will raise ￡2.7bn a year by the end of the forecast period and said this new regime will be a much more “generous” one.?This revenue was intended to fund tax cuts announced in that budget.

Understandably the current Chancellor, Rachel Reeves (then Shadow Chancellor) stated that scrapping the non-dom tax status for wealthy foreign nationals was "an utter humiliation" for the Government.”? She went on to say that "The last budget of this parliament - they've had 14 years, and they use this moment to close a non-dom tax loophole that everyone has been aware of for years."

Labour’s plans go further than the Conservatives. As an example, the Conservatives proposed that those who moved from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new four-year foreign income and gains regime will for 2025/26 only pay tax on 50% of their foreign income. Labour reportedly do not agree with this concession although we await their precise proposals.

The current Government has pledged to raise an additional ￡5.2 billion a year by closing what it calls “non-dom tax loopholes” and investing in reducing the tax gap. However, some tax accountants believe that this is a “dangerous assumption” for Labour to rely on. Only 2,400 individuals chose to pay the remittance basis charge in 2022 and it is from these people that the government is expecting to raise ￡3.2 billion. The ￡3.2 billion figures come from adding together the estimated revenue from the replacement of the non-dom regime announced by the Conservatives at the March Budget and the additional revenue Labour think can be brought in from closing ‘loopholes’ in the Conservative proposals.

Data from HMRC released last week, revealed there were 74,000 people claiming non-dom status in the tax year ending 2023, a slight rise from?68,900 in?2022, with the year-on-year increase partly being attributed to a continued recovery in new arrivals post-Covid.?

The overall tax take, which was a combination of income tax, CGT and NI contributions was ￡12.3bn in 2023.

The number of non-doms paying the higher remittance basis charge of ￡60,000 has been constant at 500 in the five years to 2022. This suggests that relying on such a small number of taxpayers to replace this may be ambitious.

The statistics show that deemed domiciled taxpayers had UK tax liabilities of at least ￡3.4bn in 2023.

However, this figure could fall significantly by 2025 as a direct result of the reaction to the changes in the non-dom rules as many of these individuals are internationally mobile.

Tax advisers have already seen a number of non-doms accelerate their plans to leave the UK and expect the number of departures to increase in the coming months as a result of the plans.?

Inheritance Tax?

?There was to be a consultation around a newly proposed IHT system. The current regime determines if IHT is due based on the situs of the asset and the domicile of the taxpayer at the date of charge.

From 6 April 2025 the intention was to move IHT to a residence-based system. IHT was to be based on worldwide assets for all individual’s resident here for 10 years and they will continue to be in the scope of IHT for 10 years after ceasing UK residence.

Trusts

Trusts settled by a non-UK domiciled individual currently benefit from protections that allow income and gains to be rolled up in the trust tax free and only become taxable when a distribution is made to a UK resident beneficiary. Under the Conservative government proposals from 6 April 2025 the protection from taxation on future income and gains as it arises within trust structures (whenever established) will be removed for all current non-domiciled and deemed domiciled individuals who do not qualify for the new year foreign income and gains rules.

The current government are likely to go further with changes which will reform?the inheritance tax treatment of existing non-UK trusts.?It is thought that this will be difficult to accept for those who felt they were encouraged to establish trusts in the first place by the last round of non-dom tax changes in 2017.?

This could have a material impact on whether large numbers of High Net Worth and Ultra High Net Worth individuals choose to stay in the UK over the longer term or look to become non-UK residents.?

Summary

The government will want to extract as much tax as possible from non doms without provoking a significant exodus and indeed for some the new rules may suit.

There is a risk however, that the UK's attractiveness and competitiveness is eroded, particularly given there are preferential tax regimes similar to the non-dom regime in other European countries such as Italy.

In Italy a new set of tax rules aim at getting the rich to relocate and invest there. As an example, for a flat fee of 100,000 euros a year all non-Italian income is free of tax.

?The problem is that the scale of any exodus from the UK will not be known until it has happened and then it is obviously too late. Also it will never be known how many individuals decide? not to come to the UK at all as a result of? the perceived tax disadvantages. ? There are many other factors in deciding where to settle, however, tax will be the driving factor for some and those impacted will naturally be reviewing their plans and future intentions, including planning to leave the UK or changing previous plans to move here. ?

The whole concept of the taxation of non-UK domiciled individuals is extremely complex and the above is an extremely basic summary of the current UK position.?