Autumn Budget 2024: practical points for non-doms and their advisers
Insight
We have closely followed the various announcements over the course of the year regarding the proposed radical reforms to the taxation of non-domiciliaries (non-doms). In yesterday’s UK Autumn Budget, the Government set out in detail its proposals regarding the future taxation of non-doms and published draft legislation. These were largely as anticipated in the Government’s July policy paper, with some changes to transitional provisions and the inheritance tax (IHT) treatment of existing trusts. In this briefing, we summarise the main changes to the non-dom rules and highlight some immediate planning points for non-doms and their advisers.
This article focusses on the changes to the taxation of non-doms. For a wider summary of the Budget, please click here. We will also be publishing a briefing on wider announced changes to IHT (including proposed restrictions on relief for business assets).
Reminder: how non-doms are currently taxed
UK tax resident non-doms are typically individuals living in the UK but who have not decided to live here permanently or indefinitely. Under a special regime (the ‘remittance basis’), they can currently choose to pay UK income tax and capital gains tax (CGT) only on income and gains that are generated in the UK or brought to the UK. Non-UK income and gains are tax free provided they remain outside the UK. In parallel, only their assets situated in the UK are within the scope of IHT.
As things stand, after a non-dom has been in the UK for 15 years they become ‘deemed dom’, losing non-dom status for UK tax purposes. When this happens, their worldwide income, gains and assets fall within scope of income tax, CGT and IHT. If a non-dom ceases UK residence, their worldwide assets remain within the scope of IHT for a further three tax years.
Importantly, before an individual becomes deemed domiciled, under current legislation they can mitigate the impact of deemed domicile by creating "protected settlement" trusts. These trusts enable income and gains in the trusts to be "rolled up" indefinitely without tax charges until distributions are made to beneficiaries. These trusts can also keep non-UK assets outside the IHT net.
Yesterday’s Budget confirmed this will all change from 6 April 2025.
Summary of the Autumn Budget non-dom tax reforms
Income tax, and capital gains tax (CGT)
New regime
- The concept of domicile will no longer be relevant to UK taxation. The remittance basis of taxation will be abolished from 6 April 2025. In principle, any person moving to the UK will be subject to tax on worldwide income and gains.
- However individuals in their first four years of UK tax residence will be able as a general rule to pay no tax on their foreign income and gains (known as the “FIG Regime”). This is regardless of whether they bring such income and gains to the UK.
- The "protected settlement" rules for trusts will be abolished for both new and pre-existing trusts. This will as a general rule result in settlors being taxed on all income and gains arising within a trust after their first four years of residence.
- Overseas Workday Relief (OWR) will make non-UK employment income exempt if it is earned during the first four years of UK residence. However, OWR will be capped at the lower of 30 per cent of an individual’s worldwide earnings and £300,000 per tax year.
Transitional rules
- For CGT purposes, individuals moving from the existing remittance regime to worldwide taxation can rebase (revalue) personal assets to their value at 6 April 2017. (It is worth noting that the top rate of CGT increased from 20 percent to 24 percent for all UK residents, effective as of yesterday’s Budget.)
- There will be a "Temporary Repatriation Facility" (TRF) for three tax years. Under this facility individuals can elect for foreign income and gains which have arisen under the current remittance regime, and not yet been brought to the UK, to be taxed at special rates. The special rate (for both income and gains) will be 12 per cent for elections made from 6 April 2025 to 5 April 2027, increasing to 15 per cent from 6 April 2027 until 5 April 2028. These funds can then be brought to the UK without any further UK tax in those three years or any time in the future.
Inheritance tax (IHT)
Basis of tax
- From 6 April 2025, IHT will be taxed solely by reference to UK tax residence. Broadly, for the first 10 years of UK residence, only UK assets will be subject to IHT. After the first 10 years of residence an individual will become a "long-term UK resident" and their worldwide assets will be within the scope of IHT. Therefore if a long-term UK resident dies, their worldwide estate is potentially subject to IHT at 40 per cent.
IHT tax tail
- After an individual has left the UK, the worldwide basis for IHT will continue to apply for a period of years (the "tail"). The length of the tail will be determined by how long the individual has been UK resident. The tail starts at three years for individuals who have been a UK resident for 10 to 13 of the previous 20 UK tax years, increasing to a maximum of 10 years for those who have been a UK resident for 20 tax years or more. In calculating the length of the tail, years of residence before 6 April 2025 will be taken into account.
Trusts
- Trusts settled by long-term UK residents will be brought within the scope of IHT. There are two different regimes which may apply: the UK’s 10 Year Charging Regime (also known as the "Relevant Property Regime") and the "Gift with a Reservation of Benefit" (GROB) rules.
- Under the 10 Year Charging Regime, trust assets are subject to IHT charges at up to 6 per cent of their value:
- On each ten-year anniversary of the creation of the trust; and
- When capital is distributed from the trust.
- Under the GROB rules, where a settlor is a long-term UK resident (ie has been in the UK for more than 10 tax years), worldwide trust assets will be treated as the settlor’s on their death for IHT purposes. However (and in a softening of previous announcements) these rules will not apply to trusts funded by non-doms before 30 October 2024, except in relation to UK assets.
- The same trust assets can be caught by both the 10 Year Charging Regime and the GROB rules, potentially resulting in double taxation.
What this means in practice – Planning points
With the reforms taking effect from 6 April 2025, taxpayers have five months to take action. We summarise below some key considerations for individuals (although of course given the complexity of the new rules specific advice would need to be taken in each case):
1. Re-structuring personally owned assets.
Individuals who have been in the UK for four years or more will face UK income tax and CGT on their worldwide assets. They may therefore want to consider specific tax wrappers. These could include offshore life insurance bonds, offshore funds, family investment companies or family partnerships.
2. Taking advantage of the final year of the current regime.
This could include taking dividends from a non-UK personal company (which will remain tax free if kept outside the UK) and/or taking steps to uplift the base cost of offshore assets to the present date.
3. Taking advantage of transitional measures.
Individuals will need to take care because unremitted income and gains that arise prior to 6 April 2025 will continue to be taxed if brought to the UK after 6 April 2025. There will however be three years in which to take advantage of the TRF to secure the special rates on remittances of pre-6 April 2025 income and gains. Careful consideration will need to be given to the interaction of the TRF and the UK’s network of double tax treaties; it will not be possible to claim credit for foreign tax paid in respect of funds which are the subject of a Temporary Repatriation Relief election.
4. Non-UK trusts.
Trusts will continue to offer attractive succession planning, asset protection and family governance advantages regardless of the non-dom tax reforms. Under the new tax regime, trusts will continue to provide a degree of tax protection in some circumstances:
IHT
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- Trusts settled before 30 October 2024 will continue to provide protection from IHT on the settlor’s death even if the settlor remains a beneficiary (ie protection from the GROB rules). However, trusts will now be exposed to the 10 Year Charging Regime from the point at which settlors become long-term UK residents (ie have been resident for more than 10 years).
- For non-doms who have been UK resident for between 10 and 15 tax years (ie for those non-doms who will become long-term UK residents on 6 April 2025 but who are not yet deemed dom) there is a window of opportunity. This is to settle non-UK assets prior to 6 April 2025 into a family trust from which they cannot benefit personally. This would provide protection from IHT on the settlor’s death (although the trust would still fall within the 10 Year Charging Regime once the settlor becomes a long-term UK resident).
- For non-doms who have been UK resident for fewer than 10 tax years, this opportunity to create settlor-excluded trusts (which will not be taxed on their death) will continue to be available after 6 April 2025 until they become long-term UK residents.
Income tax and CGT
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- Settlors who will (as a result of having been in the UK for more than four years) from 6 April 2025 be taxed directly on trust income and capital gains may wish to consider requesting substantial distributions or winding up trusts. They could do so before 6 April 2025 if they are intending to keep the proceeds outside the UK, or they may be able to do so over the next three years if they are looking to take advantage of the Temporary Repatriation Facility.
- Consideration should be given to avoiding the direct taxation of trust income on settlors by excluding the settlor (and their spouse or civil partner) from future benefit. It will generally be unrealistic to avoid the rules which attribute capital gains to UK resident settlors by exclusions.
- Trustees could also consider making investments within the trust that mitigate the settlor’s UK tax position. These might include offshore life insurance bonds and offshore funds.
- Where trusts have been settled with no intention to avoid UK tax, the rules which attribute income and gains to settlors may potentially be disapplied. In some cases, this could entirely remove trusts from the scope of income tax and CGT. However, it can be complex and difficult to claim these defences (known as "motive defences") and these defences can be easily lost. In addition there is a risk that the motive defences will be restricted or even abolished from 6 April 2026, given that the Government has announced a broader review of these rules.
5. Leaving the UK.
Some non-doms will be looking to leave the UK to avoid these changes. If individuals do wish to cease UK residence but spend time in the UK, they will need to carefully monitor and consider their UK residence position under the Statutory Residence Test on an ongoing basis. Given the confirmation that the changes will come in from 6 April 2025, many individuals will be looking to become non-UK resident before then. We now know that if non-doms do leave before 6 April 2025, the current rules regarding the IHT tail will apply (ie if they are deemed deemed domiciled when they leave they will be outside worldwide IHT after three years) and they will avoid the new extended tail so long as they do not resume UK residence within 10 years.
Key dates
30 October 2024: The Government published a Technical Note titled "Reforming the taxation of non-UK domiciled individuals" together with draft legislation. The Government also indicated it would consider wider reforms on anti-avoidance rules.
Autumn 2024 / Early 2025: The draft legislation will be considered by Parliament. There remains a possibility that amendments (probably fairly minor) will be made.
6 April 2025: The start of the new regime.
6 April 2026: The implementation of any changes following the Government’s announced review of anti-avoidance rules.
5 April 2028: The end of the Temporary Repatriation Facility.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2024