The taxation of non-doms: one step closer to the dawn of a new era

Existing non-dom regime

Where a trust has been settled by a non-dom, foreign income and most gains within the trust can roll-up free from UK income or gains tax under the ‘protected settlement’ rule.

There is a raft of complex anti-avoidance legislation, but in simple terms trust income and gains are only (potentially) subject to UK tax if distributions are made from the trust to UK resident beneficiaries.

New non-dom regime to be implemented from 6 April 2025

The ‘protected settlement’ rules for trusts will be abolished. Once a settlor has been UK resident for four years, the worldwide trust income and gains will be directly attributed to them and charged at their personal tax rates.

Potential reliefs

• The new government has confirmed that it is considering how to apply the TRF to income and gains that have built up in non-UK trusts and under the existing rules are potentially taxable in the hands of UK resident beneficiaries.
• The anti-avoidance legislation will be reviewed with a view to simplification from 5 April 2026.

Existing non-dom regime

Non-doms who have been resident in the UK for 15 or less years out of the past 20 years are only subject to UK inheritance tax on their UK assets, including UK residential property held indirectly (i.e. via a company).

After 15 years of residence in the UK, non-doms are ‘deemed domiciled’ for tax purposes and are subject to UK inheritance tax on their worldwide assets.

New non-dom regime to be implemented from 6 April 2025

Individuals who have been resident in the UK for less than 10 years (if non-UK resident for at least 10 years before that), will only be subject to UK inheritance tax on their UK assets.

After 10 years of residence, they will be subject to inheritance tax on their worldwide assets.

Existing non-dom regime

Non-UK trust assets settled by an individual who was non-domiciled at the time the assets were added to the trust are exempt from UK inheritance tax (regardless of whether the settlor subsequently becomes domiciled and is a beneficiary of the trust). These are known as ‘excluded property trusts’.

New non-dom regime to be implemented from 6 April 2025

From 6 April 2025, the ‘excluded property’ regime will end and no trusts will have any protection from IHT.

The previous government had proposed that trusts settled by a non-dom settlor before 6 April 2025 would retain their ‘excluded property’ status and would therefore be protected from inheritance tax. This proposal has been scrapped by the new government.

Although there remains a lack of clarity as to how this will work in practice, it is likely that all trusts will be taxed under the existing relevant property regime (currently applicable to trusts created by UK domiciled or deemed domiciled individuals).

This would mean trust assets being subject to 10-year anniversary charges (a maximum of 6% every ten years), entry charges and exit charges. In addition, if the settlor is not expressly excluded from benefiting under the trust, there would be a 40% charge on the settlor’s death.

Potential reliefs

The new government has conceded that it intends to implement the new regime in a way that is fair to pre-existing offshore trusts, though it is not clear what this means in practice. It may allow a grace period for previously excluded property trusts to be dismantled or apply a temporarily reduced rate of IHT.