Understanding the Non-Dom Regime and Potential Changes

Much has been written on the abolition of the UK non-domicile tax status. A lot of it in techno industry speak.

Let’s boil it down to basics.

Non-Dom vs. UK Dom:

Non-Dom: individuals who aren't considered permanent residents in the UK for tax purposes. Taxed only on income they bring into the UK, rather than their entire global income.

UK Dom: individuals are taxed on their worldwide income and subject to inheritance tax on all their assets, no matter where they are located.

Domicile Basics:

At birth, everyone receives a domicile of origin, typically from their father's domicile at the time of birth. For example, if someone is born in the UK to UK-domiciled parents, they acquire a UK domicile.

Changing domicile involves demonstrating a permanent move to a new country, cutting ties with the previous domicile, and establishing significant connections with the new one.

Tax Implications:

UK domiciled individuals are liable for UK tax on all their global income and capital gains, along with inheritance tax on their entire estate, including overseas assets.

Non-doms have been taxed only on income they bring into the UK, enjoying exemptions on income kept offshore. This made the UK an attractive location for wealthy individuals from abroad.

Historical Context and Benefits:

The non-dom tax rules originated in 1799, allowing UK residents to keep foreign income tax-free if it stays outside the UK.

These rules were attractive for non-doms, encouraging significant investment into the UK.

Non-doms often used offshore trusts and corporate structures to manage their assets, leading to substantial economic growth in regions like the Channel Islands.

Changes from April 2025:

From April 2025, domicile status will no longer determine tax liability; residence status will be the key factor. The concept of domicile for tax purposes will be replaced by residence status, determined by the statutory residence test.

Automatic Overseas Tests:

Non-Resident: spend fewer than 16 days in the UK (or 46 days if not a UK resident for the last three years).

Full-Time Work Abroad: work abroad full-time, spend fewer than 91 days in the UK, and work fewer than 31 days in the UK.

Recent Non-Resident: If non-resident for the past three tax years and spend fewer than 46 days in the UK.

Automatic UK Tests:

Resident: spend 183 days or more in the UK.

Only Home in the UK: your only home is in the UK, and you live there for at least 30 days.

Full-Time Work in the UK: you work full-time in the UK for 365 days without significant breaks.

Sufficient Ties Test:

Used if neither automatic test applies. It considers ties like:

Having family in the UK.

Having accessible accommodation in the UK.

Working in the UK for 40 days or more.

Spending 90 days or more in the UK in the past two years.

Spending more time in the UK than any other country.

Ties and Days Threshold:

Former UK Residents:

16-45 days: 4 ties

46-90 days: 3 ties

91-120 days: 2 ties

121-182 days: 1 tie

Non-Residents (last 3 years):

46-90 days: 4 ties

91-120 days: 3 ties

121-182 days: 2 ties

Individuals who have not been UK residents for the prior ten years will benefit from a tax exemption on foreign income and gains for their first four years of UK residency. They can bring these funds into the UK tax-free during this period.

After four years, these individuals will be taxed on their worldwide income and gains, with no special treatment.

Impact on Inheritance Tax:

From April 2025, individuals residing in the UK for ten years or more will be subject to inheritance tax on all their global assets.

Changes in tax treatment for trusts mean non-UK assets held in non-UK trusts will no longer be exempt from UK tax if the settlor is UK resident, leading to more assets being subject to inheritance tax.

Labour's Proposals:

Labour proposes ending the tax advantages of offshore trusts to ensure that everyone who lives in the UK pays taxes.

Uncertainty exists as to how existing trusts will be treated, but it is likely that current tax benefits could be removed. Labour aims to close loopholes to increase tax revenue.

Uncertainty and Planning Ahead:

The proposed changes create significant uncertainty for non-doms, potentially influencing decisions to relocate to other favourable tax regimes.

Current non-doms should promptly review their tax strategies. The changes significantly alter the landscape for non-doms, particularly concerning non-UK trusts and inheritance tax.

Considerations for Overseas Workers in the UK:

Internationally Mobile Employees (IMEs) can opt into the Foreign Income and Gains (FIG) regime annually, although they will lose personal allowances and annual exemptions for capital gains tax which could be a downside for some individuals.

IMEs leaving the UK temporarily during the four-year period can reclaim the FIG regime for the remaining qualifying tax years upon return.

Implications for UK Domiciled Individuals:

Speculation surrounds potential changes to inheritance tax reliefs, such as Agricultural and Business Property Relief. These reliefs currently exempt the value of qualifying assets from inheritance tax, but there is talk of introducing a cap on the maximum amount that can be claimed against these reliefs.

A suggested cap of ￡500,000 could significantly increase the number of estates paying inheritance tax.

An increase in the tax rate on carried interest (currently 28%) is also anticipated, which could impact senior fund managers with significant investments in the UK.

Conclusion:

The upcoming changes could have a significant impact on the UK and Channel Islands' trust industries.

Non-doms and UK domiciled individuals alike should act promptly to reassess their tax strategies.

With Labour’s commitment to reform, significant shifts in tax policy are on the horizon, and preparedness is key to mitigating the impact of these changes.