Navigating change: the impact of abolishing the non-dom tax regime

What is the non-domiciled status?

The non-dom regime has enabled UK residents who are domiciled outside the UK to benefit from the remittance basis of taxation, where they are only taxed in the UK on their UK source income/gains and any foreign income/gains that have been ‘remitted’ to the UK. This system has provided many individuals with the opportunity to reduce their overall UK tax burden. However, the new government have recently indicated that they wish to proceed with the changes proposed in the March 2024 Budget Announcement and complete the abolishment of this regime.

What are the new rules for foreign income and gains (FIG)?

Starting on 6 April 2025, the government are set to implement a significant overhaul of its tax regime for non-domiciled individuals, phasing out the current remittance basis and replacing it with a residence-based test. Under the new rules, FIG will no longer receive preferential tax treatment. Instead, new arrivals to the UK will not be subject to tax on their FIG during the first four years of tax residence, provided that they have not been UK tax residents for any of the previous ten tax years prior to their arrival. The new regime is designed to ease the transition into the UK tax system but has specific conditions and limitations. For example, individuals opting into the four-year FIG regime will forfeit their entitlement to personal allowances and annual exempt amounts for Capital Gains Tax during this period. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the standard tax rules for UK residents.

What does this mean for non-resident trusts and offshore structures?

The government intend to abolish the use of Excluded Property Trusts, which in the past have kept assets outside of the scope of UK IHT and are currently taking advice on how this will affect existing trusts and what transitional arrangements are required.  Full details are expected in the 2024 Autumn Budget.

Additionally, the government will also undertake a review of offshore anti-avoidance legislation, focusing on the Transfer of Assets Abroad and Settlements Regimes, with the aim of simplifying the rules and eliminating ambiguities. This review however, it is not expected to result in any legislative changes before 6 April 2026.

What transitional arrangements are in place?

Transitional measures have been put in place to support a smooth adjustment to the new tax rules, easing the shift for those affected by the change in tax status. We’ve detailed these below.

The previous policy allowing a 50% reduction in foreign income subject to tax for the first year has been abandoned. Instead, individuals who don’t qualify for the four-year foreign income and gains (FIG) regime will pay Capital Gains Tax (CGT) on foreign gains in the same way as a UK resident and UK domiciled individual. However, those that have used the remittance basis will be able to rebase their foreign capital assets when disposing of them, to their value at a date to be given in the forthcoming Budget.

A new Temporary Repatriation Facility (TRF) will allow former remittance basis users to remit FIG that arose before 6 April 2025 at a reduced tax rate. Specifics on the rate and duration will be confirmed in the Autumn Budget later this year. This facility may also apply to stockpiled income and gains in overseas structures.

Foreign income and gains arising before 6 April 2025, where the individual was being taxed under the existing remittance basis rules, will remain exempt from UK tax until they are remitted to the UK. The government is also exploring ways to expand the TRF’s scope and will provide further details soon.

What are the Inheritance Tax implications for non-doms following the changes?

From 6 April 2025, more individuals are expected to fall within the scope of UK Inheritance Tax (IHT). Under new proposals, it is thought that determining whether non-UK assets will be subject to IHT will depend on whether the individual has been a resident for at least ten years before the chargeable event date (e.g., date of death) and that once this ten-year residency threshold has been met, individuals will remain liable for UK IHT on their overseas assets for the following ten years, even if they leave the UK.

The existing IHT rules will continue to apply to deaths occurring before 6 April 2025.

Future guidance on these changes, including potential transitional arrangements, is expected to be detailed in the Autumn Budget 2024.

How we can help you

The shift from non-dom status and the associated tax changes can be complex. If you have any questions or need guidance on how to navigate these rules, please get in touch today. Our tax team is on hand to support you.

Email: [email protected] 

Phone: 01926 422292