Non-domiciled
The Non-Dom Tax Regime in the UK dates back to when income tax was first introduced in the 18th century. It allows UK resident individuals whose permanent home is outside the UK to benefit from taxation on a ‘remittance basis’. This means that UK residents are only taxed on income arising abroad to the extent that it is received in the UK (e.g. by transferring them to a UK bank account). It therefore exempts their foreign income and gains (FIG) from UK taxation unless remitted to the UK. The special regime also offers protection from Inheritance Tax on non-UK sited assets.
The relevant rules have been adjusted on numerous occasions, with the last big changes occurring in 2008 and 2017. The fundamental principles have not changed all these years. Since 2017, a non-domiciled individual can elect for the remittance basis of taxation for a maximum period of 15 years. After that the individual is treated as ‘deemed domiciled’ for taxation purposes and taxed on a worldwide basis.
For obvious reasons, the UK’s Non-Dom Regime has been hugely popular with wealthy overseas individuals and families. According to the latest figures from HMRC, about 70,000 people claimed Non-Dom Status in 2022. The concept of domicile is considered to be outdated and incentivizes individuals to keep income and gains offshore.
Phased out
As part of the March 2024 Budget, the UK has recently announced that the Non-Dom Regime will cease to exist, effective 6 April 2025. After that, the current regime will be replaced with a new residence-based test. The latter will be available for 4 years and onlyto those that have not been a resident of the UK for at least 10 consecutive years, regardless their domicile. During this 4-year period, new arrivals to the UK will not be taxed on their FIG, even if they are ‘remitted’ to the UK.
Despite the shorter period, the new regime will be significantly easier to apply and seems more attractive than the current system. The benefit would not be granted automatically, but would have to be applied for every year. After the initial 4 years, individuals will be taxed on their worldwide income and gains like any other UK tax resident. The proposed reforms would also affect inheritance taxes and trusts.
Transitional regime
Since the proposed new rules would be introduced in April next year, several transitional measures will be put in place for individuals who currently benefit from the Non-Dom Status.
Taxpayers who lose access to the remittance basis on 6 April 2025 and who are not eligible for the new regime, will only be liable for tax on 50% of their foreign income for UK tax year 2025/2026. The exemption does not apply to foreign capital gains. The following tax year they will be taxed like anyone else in the UK.
Individuals under the current Non-Dom Regime who have unremitted (and untaxed) non-UK income and gains can also opt to remit income and gains that arose before 6 April 2025 at a (reduced) tax rate of 12% until 5 April 2027 (‘Temporary Repatriation Facility’). After that, the standard tax rates will apply.
Foreign Trusts
The new regime will also impact trusts set up abroad by Non-Dom Individuals. Under the current system, they are subject to a special tax regime whereby income and capital gains can accrue in the trust without incurring UK tax. Only upon distribution, UK taxes apply. Under the new regime, this tax exemption will be abolished.
From 6 April 2025, foreign income and capital gains as well as certain benefits from trust structures (regardless of when they were established) would be fully exempt for qualifying individuals under the new favored regime during the first 4 years of their tax residence in the UK.
A transparent taxation would be introduced for non-qualifying individuals. Income and capital gains from trust structures established outside the UK would be taxed on the settlor or transferor once they have been tax resident in the UK for more than 4 tax years, but without any further taxation on the distributions by the trustees.
UK Inheritance tax
In the UK, liability to Inheritance Tax (IHT) depends on domicile status and location of assets. Under the current regime, if a person is UK resident for 15 out of the last 20 tax years, they are deemed to be UK domiciled, and remain deemed domiciled until their 4th year of non-UK residence. If a person is UK domiciled or deemed domiciled, they are liable for IHT on their worldwide assets.
The current proposal includes that who has been tax resident in the UK for 10 years, will be ‘tracked’ for another 10 years after their departure (‘tail-provision’). If the taxpayer passes away within this 10-year period, their worldwide assets will be subject to UK inheritance tax. To provide certainty on offshore Trusts, the UK Government has confirmed that where non-UK assets are settled into a trust by a non-UK domiciled settlor prior to 6 April 2025, these assets will continue to be protected from UK IHT. It is expected that UK-situated assets will remain chargeable to UK IHT on the same basis as at present, regardless of an individual’s residence status.
What’s next ?
We need to stress that it is not yet clear whether the proposed changes will be implemented in their current form or, whether further changes can be expected.
While it has been suggested that the new regime is easier to apply, it will still produce a variety of scenarios with several layers of complexity. It is a given fact that these are important changes to the tax regime for non-doms. The transitional provisions give taxpayers some extra time to arrange their affairs before the new rules take effect, but those benefitting from the special status should take immediate action.
It remains to be seen if the proposed changes will continue to attract wealthy and talented individuals to the UK or whether it will lose its appeal, and people will opt for a non-dom regime elsewhere.