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UK Government announcement: more clarity on changes to the non-dom regime

Insight

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This article was published before the UK Government’s Autumn Budget 2024. For our most recent article, published following the Autumn Budget 2024 and therefore reflecting latest developments, please click on the link below.

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Shortly after the General Election, we wrote about Labour’s proposals for reforming the UK’s tax regime for non-doms: Is the end in sight for non-doms? What tax changes can we expect from the UK’s new Labour Government? On Monday 29 July, the new Government published its first policy paper on the non-dom changes, while the Chancellor (the UK’s minister of finance) made a statement to the House of Commons on the public finances more generally. This policy document gives us the best idea yet of what to expect and when it will happen.

The theme of the 29 July statement was a £20 billion "black hole" in the UK’s public finances. We can expect that the Government is considering all options on the table to fill this hole, and the new Government is committed to reforms to the non-dom regime as one way to increase tax revenue.

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, they can currently choose to pay UK income tax and capital gains tax only on income and gains that are generated in the UK or brought to the UK. Non-UK income and gains are therefore tax free provided they remain outside the UK. In parallel, only their assets situated in the UK are within the scope of inheritance tax (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 tax purposes. When this happens, their worldwide income, gains and assets fall within scope of income tax, capital gains tax and IHT: the three main UK personal taxes.

Importantly, before an individual becomes deemed domiciled, 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.

It is now clear that all this will change from 6 April 2025.

The new Government’s proposals for non-doms

The table below summarises the journey of the proposed changes to the current non-dom regime, from the original announcement in March to the policy paper released this week by the UK’s new Government.

Income tax and Capital Gains tax

What was announced by the UK's previous government in March 2024 What the Labour Party said in advance of the UK general election 29 July announcement Comments
Arrivers to the UK will not be taxed on their foreign income and gains for the first four years of UK residence.

No change

No change

 
The new regime will start on 6 April 2025.

No change

No change

Given the short timeframe, we expect that the draft legislation will be released on or around budget day (30 October) but this has not been confirmed.
The ‘protected settlement’ rules for trusts will be abolished, resulting in the direct attribution of worldwide trust income and gains to settlors after they have been UK resident for four years.

No change

No change

 
Non-doms moving from the existing regime to worldwide taxation could rebase (re-value) their personal assets to 6 April 2019 when calculating the taxable gain.

No change

Confirmed there will be a re-basing for capital gains tax but that the Government has yet to decide the relevant date.

 
In the first year of the new regime, non-doms losing access to the remittance basis would benefit from a 50% reduction in income tax. This will not happen. Confirmed that this will not happen.  
There will a ‘Temporary Repatriation Facility’ (TRF) under which non-doms, and former non-doms, could bring to the UK foreign income and gains which have arisen under the current regime and not yet been taxed at a rate of 12% income (ordinarily up to 45%) and gains (typically 20%). This would apply to remittances between 6 April 2025 and 5 April 2027. Confirmed in principle.

Confirmed there will be a TRF but not what the rate will be nor for how long.

The Government is looking at how to include income and gains which have arisen in non-UK trusts within the relief.
It seems likely that the rate for the TRF will now be higher than 12% particularly given that it is very probable that the current 20% rate of capital gains tax will be increased over the next few months.
   

The new Government has announced a review of certain anti-avoidance legislation which attributes income and gains from non-UK structures to UK resident individuals. This will be subject to consultation and implemented from 6 April 2026. 

We expect that the new rules which tax non doms in relation to non-UK structures will be implemented via these anti-avoidance provisions. It is therefore not surprising that the Government will take the opportunity to review these rules. In particular there is currently a defence (known as the Motive Defence) which blocks the rules from applying where structures are not intended to avoid UK tax. The Motive Defence, as it stands, could protect many non-UK structures from exposure to the new rules so it is possible that the Government will look to limit its application.  
Inheritance tax (IHT)
What was announced by the UK's previous government in March 2024 What the Labour Party said in advance of the UK general election 29 July announcement Comments
Inheritance tax (IHT) will be based solely on tax residence. For the first 10 years of UK residence only UK assets will be subject to IHT. After 10 years of UK residence, IHT will apply to worldwide assets and the worldwide basis will continue to apply for 10 years after the individual has left the UK (often called a 10-year tail).

No change

No change

The expected consultation has now been cancelled with the Government proposing to take account of feedback already received and to gather further feedback over the summer.

Trusts created after 6 April 2025 will be brought within the new residence-based regime.

Trusts created by non-doms before 6 April 2025 will retain their protection from IHT on non-UK assets.

Trusts will not have any protection from IHT and will fall within the new regime.

No special rules for trusts created before 6 April 2025.

Regime for trusts will change so that taxpayers who are within UK IHT will pay IHT in relation to non-UK assets held in trust.

To begin on 6 April 2025.

It is not clear how this will be achieved. It seems likely that these trusts will be taxed under the existing regime for trusts created by UK domiciled or deemed domiciled individuals. This would mean trust assets being subject to the 10-year charge regime a (a maximum of 6% every ten years) in addition to a 40% charge on the settlor’s death if the settlor is not excluded from benefit.

The paper also refers to implementing the changes in a way that is fair in relation to pre-existing offshore trusts and it is not clear what the Government has in mind for that. It could be that there is an opportunity for trusts to be unwound, or, as has been done previously, a proportional reduction to the IHT charges when they first apply.

What this means for non-doms

Importantly, the new Government has confirmed that the new regime will be introduced from 6 April 2025, leaving only eight months for taxpayers to take action. There is still very little detail: in fact, some aspects are less clear than they appeared to be previously, such as the rebasing date for capital gains tax and the rate which will apply for the Temporary Repatriation Facility.

However we do now have a firm date for the UK’s financial budget (30 October 2024) and these most recent announcements confirm that we will get more detail on the changes then (although it is not clear whether this will amount to actual draft legislation).

The focus in many cases will be taking advantage of the remittance basis for this last remaining tax year. This will look very different in each case but could include looking to take an offshore distribution from a non-UK trust, taking dividends from a personal company and/or taking steps to uplift the base cost of offshore assets. Options to mitigate UK tax going forwards under the new regime include excluding UK resident settlors, using tax efficient investment such as family investment companies and offshore insurance bonds and relying on the network of double taxation agreements which the UK has with other countries.

In most cases implementation should/could wait until after draft legislation on the changes has been released to have as much clarity as possible. We hope this will be around the UK’s Budget Day (30 October) but this has not been confirmed. However, there will be cases where there is no reason to wait and even where it is better to implement any planning before the 30 October Budget. In any event we recommend taking advice as soon as possible.

Some non-doms will be looking to leave the UK to escape these changes. Given the confirmation that the changes will come in from 6 April 2025, the ideal would be to become non-UK resident from 6 April 2025. This will require considering the UK’s statutory residency test, in particular to understand how much time can be spent in the UK while being non-UK resident, as well as fulfilling the requirements for their destination country and planning their affairs for an efficient and smooth move.

Timeline of changes to non-dom regime

  • Summer 2024: Continuing Government review of stakeholder feedback, and external engagement on IHT. However, there will be no formal consultation on the new IHT rules.
  • 30 October 2024: Budget Day. (This is when the UK’s Chancellor reports on the nation’s finances and the Government’s proposals for changes to taxation). We expect that draft legislation will be put before Parliament on or around the date of the Budget, however the timing of this remains unclear.
  • 6 April 2025: The effective date of the new regime.
  • 6 April 2026: Possibly, implementation of any changes to certain anti-avoidance rules.

We will continue to monitor developments.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, August 2024

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Russell Cohen

Partner

Russell has over twenty years of experience in advising clients how to navigate the complexities of private wealth. He has a personable and collaborative style, and is known for advice that is practical and pragmatic.

Russell has over twenty years of experience in advising clients how to navigate the complexities of private wealth. He has a personable and collaborative style, and is known for advice that is practical and pragmatic.

Email Russell +44 (0)20 3375 7144
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Claire Randall

Partner

Claire advises UK and international clients on their estate and tax planning affairs. She is recognised for her ability to find practical solutions to complex issues involving UK taxation, including for individuals moving to or back to the UK, and UK resident individuals setting up or benefitting from offshore structures and investing in the UK. Claire also has experience in making tax disclosures and settlements with HMRC.

Claire advises UK and international clients on their estate and tax planning affairs. She is recognised for her ability to find practical solutions to complex issues involving UK taxation, including for individuals moving to or back to the UK, and UK resident individuals setting up or benefitting from offshore structures and investing in the UK. Claire also has experience in making tax disclosures and settlements with HMRC.

Email Claire +44 (0)20 3375 7465
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Tristan Honeyborne

Associate

Tristan is a private client lawyer whose specialisms include tax, trusts and estate and succession planning. Tristan works with a wide range of clients, including international high net worth individuals, professional trustees and family offices and his interests include offshore tax, cross-border estate planning and philanthropy.

Tristan is a private client lawyer whose specialisms include tax, trusts and estate and succession planning. Tristan works with a wide range of clients, including international high net worth individuals, professional trustees and family offices and his interests include offshore tax, cross-border estate planning and philanthropy.

Email Tristan +44 (0)20 3375 7834
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