The UK Spring Budget: Impact on Non-Doms

The below article was revised on 24 April 2024.

The Chancellor, Jeremy Hunt, announced radical changes to the non-dom regime in the Spring Budget on 6 March 2024.

The proposals affect all non-UK domiciled individuals (including those who are deemed domiciled), but their impact depends on whether:

• you are thinking of moving to the UK from abroad,
• you are a non-dom and have been UK resident for fewer than four tax years,
• you are a non-dom who has been UK resident for between four and ten tax years, and
• you are a non-dom who has been UK resident for more than ten years.

Some points to note:

• Despite the hype, ‘non-dom status’ is not being abolished. It remains relevant for many purposes including which law applies to the succession to your estate and capacity matters.
• The proposals change the basis of liability to UK tax from domicile to residence.
• We do not have much detail about the proposed new rules and the inheritance tax changes in particular will be subject to a consultation with stakeholders. HMRC is holding a series of ‘listening events’ in May.
• If there is a change of government at the next general election (which must take place by January 2025 and is likely to happen in November this year, if not before) the proposals may change again.
• This note relates to individuals who are non-UK domiciled under the current rules.
• A ‘year’ is a tax year which runs from 6 April in one year to 5 April in the next year.

What is not changing

As now, a UK resident person, irrespective of domicile, will be subject to UK income and capital gains tax on all income and gains arising in the UK. This includes employment income, although special rules apply in the first three years of residence for those who work both in the UK and abroad.

Everyone, whether UK domiciled or not and whether UK resident or not, is subject to inheritance tax on UK located assets such as UK real estate or shares in a UK company. Inheritance tax is chargeable on certain lifetime gifts and at 40% on your estate on death.

The current non-dom rules

Broadly, non-dom status lasts for 15 years. During this time:

• You can claim ‘the remittance basis’ which means that non-UK income and gains are taxable in the UK only if you, a family member or a connected company or trust bring the funds to the UK. You are not taxable on foreign income and gains kept outside the UK.
• Your non-UK assets are outside the scope of inheritance tax.

After 15 years’ residence, you become ‘deemed domiciled’ which means that you are taxable in the UK on your worldwide income, gains and assets.

If you set up a trust before becoming deemed domiciled, non-UK trust assets are exempt from inheritance tax and non-UK trust income and gains are not taxable unless and until a UK beneficiary receives something from the trust.

What may be changing? The new proposals

The possible new immigrant

If you are being seconded to the UK by your employer, you will have little choice about whether to come to the UK or not. If you will be resident for a short period, the new proposals may be of benefit to you.

If you don’t have to come to the UK but are thinking about it, you will need to consider your plans and decide whether the proposed new rules will be good or bad for you. You will also want to consider the tax regimes for new immigrants offered by many countries, in Europe and beyond, which may better suit your needs.

The short-term resident (up to four years)

If you are a non-dom currently in the UK and expect to be resident for no more than four years, or you come to the UK for up to four years (and have been non-UK resident for at least the previous ten years), the new rules look attractive.

The remittance basis will be abolished and replaced by a new ‘four-year regime.’ You will not be taxable at all on your non-UK income and gains for the first four years of residence and you will be free to bring them to the UK to spend or invest without a tax charge.

Distributions from trusts will also be tax free.

Your non-UK assets will not be subject to inheritance tax.

The four to ten year resident

For the first ten years of residence, your non-UK assets remain outside the scope of inheritance tax. This includes any assets in a trust you set up, whether before or after becoming UK resident.

Once you have been resident for more than four years, you are subject:

• to income tax and capital gains tax on the income and gains from your worldwide personally held assets,
• to income tax and capital gains tax on the worldwide income and gains arising in an offshore trust of which you are the settlor / grantor if you or your spouse can benefit from it,
• to capital gains tax on the worldwide capital gains of an offshore trust of which you are the settlor / grantor if you are excluded from benefit, but your children or grandchildren can benefit, and
• on a payment or benefit received anywhere in the world from an offshore trust.

If you are liable for tax as settlor / grantor, you may be able to claim reimbursement from the trustees.

The longer-term resident

Once you have been resident for more than ten years:

• You remain subject to income and capital gains tax on worldwide income and gains as above.
• Your worldwide assets are subject to inheritance tax.
• Inheritance tax is payable on worldwide assets in any trust you created from 6 April 2025, including a trust made during your initial four or ten year periods of residence.
• If you can benefit from the trust, the trust assets are treated as if you owned them, and you would potentially be subject to inheritance tax in the event of your death at 40% on their value.
• If you then leave the UK, you will remain subject to these inheritance tax rules for a further ten years.

The government has stated that trusts established with non-UK assets by 5 April 2025 will remain exempt from inheritance tax trust charges. A settlor who can benefit from a pre-April 2025 trust will not be subject to inheritance tax by reference to the trust assets.

Bear in mind that this is all subject to consultation and may change.

The longer-term resident who has already been here more than ten years

If you become non-UK resident by 5 April 2025 you should not become subject to the new rules and should not be subject to the ten-year inheritance tax ‘tail.’ We can advise on how to become and remain non-resident.

The Government has proposed some transitional provisions which may reduce your liabilities in the first few years, but the Labour party has already announced that it would tighten up some of this in a Press Release discussed below. The Government proposals are:

• A trust set up with non-UK assets before April 2025 will give long-term protection against inheritance tax
• If you have already been in the UK for more than four years, only 50% of your personal offshore income will be taxable in 2025 / 26. Any trust income and all capital gains will be fully taxable.
• If you are not domiciled or deemed domiciled and you have at some point claimed the remittance basis, you will be able to rebase your personally held assets to their value as at 5 April 2019, if you sell or give away the assets after 5 April 2025.
• A ‘Temporary Repatriation Facility’ will apply for 2025 / 26 and 2026 / 27 only. If you are UK resident in those years you will pay tax at only 12% on remittances of your pre-6 April 2025 foreign income and gains.

What is the Labour Party’s view?

It has long been the policy of the Labour Party to ‘abolish non-dom status’ and its attendant tax benefits. A recently issued Labour Press Release states that Labour supports the replacement of the non-dom rules, the four-year arrival window and the ten-year inheritance tax window but announces plans to “close the loopholes” in the government’s proposals.

The most worrying aspect is that Labour would abolish excluded property trust status from 6 April 2025. This means that trusts made by a non-dom settlor / grantor would be brought fully within the inheritance tax net on that date. The trusts themselves would be subject to tax charges and if the settlor / grantor can benefit from the trust, there could be a charge on the settlor’s / grantor’s death. This will apply to all trusts, whenever made. It is not clear how a trust will be dealt with if the settlor / grantor was non-resident when he set it up, or if, after having set it up, the settlor / grantor becomes non-resident or dies.

Labour would also scrap the 50% reduction in taxable offshore income in the first year of the regime.

On the positive side, Labour would consider exempting UK investment income from tax in the first four years to encourage investment in the UK. They will also explore how to encourage non-doms to remit stockpiled foreign income and gains to the UK but it is not clear whether they will use the carrot of extending the temporary repatriation facility or the stick of penalising income and gains left offshore.

What do I do now?

Wherever you are in terms of residence and domicile, you will need advice on your future tax position and your options. We would advise you to be cautious about taking immediate action as we do not know what the rules will ultimately be. You should, however, be thinking about the action you might take, especially if you are considering leaving the UK, so you are ready to go ahead when we have some clarity on the new regime.

Our team of experts are ready to help you prepare for whatever the future brings.