As part of the Spring Budget delivered on 6 March 2024, former Chancellor, Jeremy Hunt, announced a series of sweeping reforms to replace the current tax regime for UK resident, non-UK domiciled individuals (‘non-doms’).
For the latest updates on this topic visit Budget changes for non-doms
Following the General Election earlier this year, the new Labour government recently released a short policy paper committing to these changes in broadly the same form as initially announced by the Conservatives.
Ahead of the Autumn Budget, scheduled to take place on Wednesday 30 October 2024, it is helpful to reflect on the policies announced by the Labour government, how these differ from the reforms proposed by the Conservatives and how the changes may impact non-UK domiciled individuals living in the UK.
What is non dom tax status at present?
Most UK tax residents are taxed on the arising basis, which means they are liable to UK tax on their worldwide income and gains.
However, under the current rules, those who are UK tax resident, but non-UK domiciled have the option to claim the remittance basis of taxation. Those claiming the remittance basis will be subject to UK tax on their UK source income and gains, but only liable to UK tax on their foreign income and gains that are remitted to or enjoyed in the UK.
A consequence of claiming the remittance basis is that the individual will lose their entitlement to the personal allowance and capital gains tax (‘CGT’) annual exempt amount for the tax year that the claim is made. There’s no charge to use the remittance basis until an individual has been UK tax resident for more than seven out of the previous nine tax years. After that, it costs £30,000 each year to claim the remittance basis. This charge increases to £60,000 once an individual has been resident for more than 12 years.
Once a taxpayer has been UK tax resident in 15 out of the previous 20 tax years, they will be deemed domiciled for UK tax purposes and no longer able to claim the remittance basis of taxation. Such individuals are therefore required to pay UK tax on their worldwide income and gains as they arise.
At present, non-UK domiciled individuals are also only subject to inheritance tax (IHT) on their UK situs assets, whereas individuals domiciled in the UK (including those who are deemed-domiciled for tax purposes) are subject to IHT on their worldwide assets (although reliefs may apply). This is the case, regardless of where the individual is resident at the date of death.
There are also differences in the way in which anti-avoidance provisions are applied to non-UK domiciled individuals, particularly in respect of trusts. If you are a beneficiary of a trust or are considering setting up a trust, seeking UK tax advice is vital.
The new tax regime for non doms
CGT and income tax
From 6 April 2025, a new regime will apply for individuals who become UK tax resident after a period of at least 10 consecutive tax years of non-residence. For a period of four tax years commencing when the individual first becomes UK tax resident, the individual will not (subject to making a claim) pay UK tax on their foreign income and gains arising in a tax year regardless of whether or not these funds are brought to the UK. The government has referred to his new system as the FIG (foreign income and gains) regime.
This FIG regime is intended to be simpler than the existing remittance basis rules, as individuals will no longer be required to track their foreign income and gains or keep these funds offshore.
Individuals who, on 6 April 2025, have been tax resident for less than four years (following 10 consecutive years of non-residence) will be able to utilise the FIG regime for any tax year of UK residence which falls within the remainder of the four-year period commencing when the individual became UK tax resident.
After the four-year period has elapsed, it will no longer be possible to claim tax relief under this regime and the individual will be subject to UK tax on their worldwide income and gains. This is a significant change from the existing rules, which allow for non-UK domiciled individuals to claim the remittance basis for a period of 15 tax years before becoming deemed domiciled.
It appears that the FIG regime will apply equally to individuals who are UK domiciled and non-UK domiciled. There is, therefore, potential for UK domiciled individuals returning to the UK after an extended period of at least 10 tax years of non-UK residence, who are currently not eligible to claim the remittance basis of taxation, to benefit from the introduction of this regime.
If an individual leaves the UK temporarily within the four-year period in which they are eligible for the FIG regime, they may still be eligible to make a claim if they return to the UK in respect of the years that remain within the four-year period. For example, if an individual becomes UK tax resident in 2025-26, is non-UK tax resident in 2026-27 and then UK tax resident again from 2027-28 onwards, they will only be able to utilise the FIG regime for the 2025-26, 2027-28 and 2028-29 tax years; they will not get a full four tax years of relief.
An individual’s residence status for the purposes of the FIG regime will be determined using the Statutory Residence Test.
The previous Conservative government proposal included a published technical guidance paper which further outlined their proposed reforms. Within this guidance, the Conservatives indicated that treaty residence or non-residence and split years would be ignored for the purposes of this regime. While the Labour government have not commented specifically on split year or treaty residence, we expect that they will adopt the same policy.
When an individual comes to or leaves the UK part way through a tax year, they may qualify to split the tax year into a UK tax resident part and non-UK tax resident part if certain conditions are met. It is expected that split years will be treated as full years of UK residence for the purposes of the FIG regime. The actual period for which the FIG regime can be utilised may therefore be less than four full years.
A claim must be made within the individual’s self-assessment tax return for each year in which they wish to rely on this relief.
If an individual elects to be taxed under the new FIG regime, it is expected that they will lose their entitlement to the income tax personal allowance (£12,750 for the 2023-24 tax year) and CGT Annual Exempt Amount (£6,000 for the 2023-24 tax year). This mirrors the current remittance basis regime and means that the regime may not provide more simplicity for taxpayers with small amounts of foreign income and capital gains.
There is not a charge for claiming this new relief which sets it apart from the remittance basis and similar regimes in jurisdictions like Italy (which has recently increased the level of its lump sum taxation to €200,000 per annum for new applicants).
Transitional provisions
As part of their Spring Budget, the Conservative party announced a series of transitional reliefs for those taxpayers losing the ability to claim the remittance basis. The Labour government have committed to introducing some of these reliefs but have indicated that changes may be made to the details of these policies as outlined below.
50% reduction of the amount of foreign income subject to tax
The Conservative party announced a 50% reduction of foreign taxable income in 2025-26 for those taxpayers who would no longer have the ability to claim the remittance basis. The Labour government have stated that this relief will not be available.
Rebasing capital gains tax
From 5 April 2025, individuals who have previously claimed the remittance basis will be able to rebase their foreign capital assets held personally.
The Conservative party proposal was for non-UK domiciled individuals to rebase their assets to 5 April 2019. Whilst the Labour government has confirmed that this transitional relief will be available, they have stated that the date of the rebasing will be reviewed and announced in the October Budget.
Technical guidance provided by the Conservatives following the Spring Budget indicated that this rebasing relief may be subject to further conditions. No additional detail was provided by the Conservatives on what these conditions may be, and the Labour government have not commented on this specific matter. Further detail is expected to be provided as part of the October Budget.
We expect, based on the Conservative policy, that this rebasing relief will only apply to non-UK situs assets held personally and not to assets held within non-UK resident trusts (although the Labour government have not made specific commented on this matter). The wider implications of these reforms for offshore trusts are discussed later in this article.
An individual who is eligible to claim relief under the new FIG regime, who disposes of a foreign asset within the qualifying four-year period, will not be liable to pay UK tax on the gain arising on sale regardless of whether or not the proceeds are remitted to the UK. In this case, a rebasing election should not be required.
Care should be taken when remitting the proceeds received on the sale of foreign assets to the UK. Under the current rules, it is not possible to easily separate the gain arising on the sale of an asset from the funds used to purchase it. If foreign income or gains have been used to acquire an asset (assessable under the remittance basis regime) bringing the proceeds to the UK could trigger a UK tax charge. The rate of tax applicable would depend on the tax year in which the funds are brought to the UK (see below).
If a taxpayer does not anticipate a need to use the proceeds received on the disposal of their non-UK situs assets in the UK going forward, they may find it beneficial to not make a rebasing election and instead rebase their foreign assets (via a disposal and reacquisition) immediately prior to 6 April 2025.
The Labour government has not yet commented on the treatment of capital losses arising on the disposal of non-UK situs assets during a tax year in which an individual is claiming the new FIG regime. Our assumption, however, is that such losses would not be allowable to offset against chargeable gains for capital gains tax purposes.
Temporary Repatriation Facility
Foreign income and gains which arose before 5 April 2025, while an individual was taxed under the remittance basis, will continue to be taxable when remitted to the UK (as is the case under the current rules).
When an individual remits funds to the UK, it will be necessary to identify the source of the funds remitted to determine whether the remittance is of previously accrued foreign income or gains (subject to UK tax) or contains clean capital. Where a remittance is made from an account containing a mixture of income, gains and clean capital or funds that derive from more than one tax year, it is currently necessary to apply strict ordering provisions to determine the source of the remitted funds. These are referred to as the mixed fund ordering rules.
A Temporary Repatriation Facility (TRF) will be available for those who have previously claimed the remittance basis, allowing them to remit previously accrued foreign income and gains to the UK following 6 April 2025 at a reduced rate for a limited period of time.
The Conservatives intended for the TRF to be available for a two-year period from 6 April 2025 to 5 April 2027 with remittances under the facility being taxed at a flat rate of 12%. However, the Labour government have stated that the rate and length of time of the TRF is still under review.
The Conservatives also indicated that the TRF would only be available on foreign income and gains which arose to the individual personally. The Labour government is, however, looking to extend TRF to stockpiled income and gains within overseas structures. Further details will be announced in the October Budget.
In their technical guidance, the Conservatives suggested that changes may be made to current mixed fund ordering rules to make these provisions simpler for the taxpayer. No further details were provided on how these reforms may work in practice and the Labour government have not yet commented on this.
Overseas Workday Relief
The Labour government have announced that Overseas Workday Relief (OWR), which provides relief from UK tax on earnings from employment duties performed outside of the UK, will continue to be available in some form. There are various listening events currently taking place where professional advisors are providing feedback to HMRC on the practicality of OWR.
The Conservatives provided more detail on how they envisaged OWR would interact with the new FIG regime. It was anticipated that OWR would continue to be available for the first three years of UK residence where an individual is eligible to be taxed under the FIG regime. It was expected that the rules would provide relief from income tax on earnings from employment duties performed outside of the UK regardless of whether or not these earnings are brought to the UK (representing a significant simplification of the current rules).
The Labour party have not provided any indication of how OWR will apply following 6 April 2025 and have confirmed that further details will be made available as part of the October Budget.
Offshore trusts
From 6 April 2025, the protections from taxation of income and gains arising within settlor-interested trust structures will be removed for all taxpayers who do not qualify for the new FIG regime.
Under the current regime, UK resident settlors of non-UK resident trusts which are ‘settlor-interested’ can be personally assessed on income arising within the trust structure under two sets of provisions: the settlements code and the Transfer of Assets Abroad code. The settlements code applies specifically to income arising at trust level; however, the Transfer of Assets Abroad code applies more broadly and can bring into scope income arising to underlying non-UK companies of a trust.
Similar provisions apply for CGT purposes, which can attribute chargeable gains arising to a settlor-interested trust or underlying company to a UK resident settlor.
Settlors who are non-UK domiciled or deemed domiciled (by virtue of having been UK tax resident for 15 of the previous 20 tax years) can currently benefit from protections from UK taxation. Provided no property or value has been added to the trust following the settlor becoming deemed domiciled, the settlor should not be liable to pay UK tax on the foreign income and gains arising within the trust structure as it arises. Foreign income and gains arising within the trust are instead pooled and only taxed if matched to capital payments received by UK resident beneficiaries.
The fact that foreign income and gains arising to protected trusts can, broadly, accumulate tax-free under the current regime has meant that non-UK resident trusts have been a popular structure for many non-UK domiciled and deemed domiciled individuals since 2017.
From 6 April 2025, foreign income and gains arising in offshore trust structures which are settlor-interested will be taxed on UK resident settlors on an arising basis unless they qualify for the FIG regime.
The implications of this change in the legislation are expected to be significant and individuals whose assets are currently invested via non-UK trusts should take advice as soon as possible.
Capital payments made to UK tax resident beneficiaries of non-UK trusts who are not eligible for the FIG regime will continue to match to relevant income and gains within the trust structure and will be taxable at their marginal tax rates.
We expect that beneficiaries who are within the FIG regime will be able to receive income distributions and capital payments from a non-UK resident trust without triggering a UK tax charge (regardless of whether or not the benefit is received in the UK). However, capital payments made to beneficiaries who are eligible for the FIG regime will not match to trust income and gains and so it will not be possible to ‘wash-out’ the income and gains of the trust to such individuals. Moreover, distributions to individuals eligible for the FIG regime will be subject to modified onward gifting provisions, presumably aimed at preventing trustees making distributions to such individuals, who then make onward gifts to other UK resident individuals.
It has been stated that the Labour Government intends to review the anti-avoidance provisions which apply to offshore structures, including the settlements code and the Transfer of Assets Abroad code, to ensure they are fit for purpose. Any changes resulting from this review is likely to only come into effect before 6 April 2026 at the earliest. This does create a further element of uncertainty for those individuals with interests in overseas entities.
Inheritance tax
The Labour government has confirmed the intention to move to a residence based inheritance tax (IHT) scheme from 6 April 2025. This is in line with the policies proposed by the Conservatives.
Given the significance of this change, the Conservatives intended to carry out a formal policy consultation on these reforms. The Labour government have confirmed that there will not be a full consultation on the new IHT regime; instead, HM Treasury and the government will review stakeholder feedback following the Spring Budget and undertake further external engagement over the summer on the policy design.
The current proposal foresees individuals being subject to UK IHT on their worldwide assets once they have been UK tax resident for a period of 10 years.
In addition, the current proposal suggests that, once an individual meets the residence condition, they will remain within the scope of UK IHT unless they become, and remain, non-UK tax resident for a period of 10 years.
The Conservatives indicated that ‘other connecting factors’, so facts such as citizenship or place of birth may also count towards determining an individual’s IHT position. The Labour government have not commented on this point.
IHT and trusts
At present, non-UK property comprised in a settlement settled by a non-UK domiciled individual is not subject to UK IHT (with the exception of an indirect holding in UK residential property).
The Labour government have announced an intention to end the use of excluded property trusts to protect assets from IHT. It therefore appears the government is intending to move away from the position of using the settlor’s status at the date of settlement to determine the IHT status of a trust, although the position is not yet clear.
This will impact the IHT position for both the trustees of trusts, and settlor’s who are able to benefit from a trust and may therefore be taxable under the Gift with Reservation of Benefit Rules.
The government did acknowledge that individuals will have established trusts based on the current rules and have said that they will consider how the extensive changes can be implemented to achieve their policy whilst allowing an appropriate adjustment for existing trusts. It is intended that transitional arrangements for those impacted will be announced at the October Budget.
UK double tax treaties
The UK currently has various estate tax treaties which provide bilateral relief from double taxation in respect of certain jurisdictions. The treaties look at domicile as a determining factor for establishing which jurisdiction as the primary or sole taxing rights in respect of the assets of a deceased individual. It is currently unclear whether these treaties will be revised to take account of the new tax rules.
The UK IHT legislation does include a unilateral relief from double taxation; the government may therefore decide to move away from these treaties altogether. It is likely that the impact and benefit of the double tax treaties will need to form part of the consultation.
Should I leave the UK for tax purposes?
In light of the uncertainty around the UK tax regime, many individuals are considering the option of relocating to another jurisdiction. If you’re thinking about moving abroad, there are many factors to take into account:
- Does the jurisdiction you are considering suit your family’s needs? Key considerations for moving to or remaining in the UK include high standards of schooling and education at all levels, relatively high standards of personal safety for a large, developed economy, use of English as a first language, and a combination of a rich traditional and international culture. In many cases, these factors will be the most impactful on family happiness and success.
- What is the tax regime? Whether you’re looking for a tax advantaged jurisdiction, or simply one with more certainty, it’s important to get specific advice on how you’ll be taxed once a resident there.
- Will you need a visa or residency permit? It’s also important to understand if and how you can become a resident.
- When will you cease to become UK tax resident? This may be the end of the tax year in which you leave (ie 5 April) or could be earlier if you qualify for split year treatment. For more information, visit the UK’s Statutory Residence Test article.
- Can you remain non-UK tax resident? Individuals are limited on how much time they can spend in the UK without being considered UK resident. This varies depending on an individual’s circumstances. If you’re thinking of moving abroad, it’s important to consider how much time you’ll want to spend in the UK and if it’s feasible to become non-resident.
Next steps
Although the policy paper published by the Labour government does not provide us with much additional detail on the new FIG regime or the proposed new IHT regime, it does deliver clarity on Labour’s intentions to progress with the reforms to the taxation of non-UK domiciled individuals and offshore trusts from 6 April 2025. Whilst we await the detail which will be delivered in the October Budget, we urge non-doms to review their affairs, and start conversations with their advisors sooner rather than later to highlight potential planning opportunities before the end of the current tax year.
If you would like any further information on the points raised, please get in touch with Alexandra Britton-Davis or Steven Coelho.
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