Tax advice

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

2 Aug 2024

Articles

A policy paper fleshing out the Labour government’s proposed new tax regime for non-UK domiciled individuals (non-doms) was published earlier this week.

The content is still high-level, building on the foundations laid by the old government in its 2024 Spring Budget (then tweaked by the new government’s pre-election manifesto). It purportedly aims to strike a balance between attracting international investors and ensuring a fair contribution to the UK tax system.

The overarching takeaway from the policy paper is that the technical details and their practical application will not be known until Rachel Reeve’s first Budget on 30 October, but it does provide some notable signposts as to what lies ahead for UK resident non-doms.

Though we will have to watch and wait for the Budget for any certainty, it is a further reminder for existing UK resident non-doms to be alive to the changes on the horizon and their potentially significant fiscal implications.

To help those wondering what the changes might mean for them and whether they should be taking advice now to put them in the best position to take action after the Budget, we have prepared a comparison of the existing regime and what we know so far about the new one.

Paul Fairbairn

Partner
Private wealth

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Comparison of the existing non-dom regime vs. the new non-dom regime to be implemented from 6 April 2025

Income and gains tax treatment for individuals

Existing non-dom regime

As soon as an individual becomes UK resident, their UK source income and gains are subject to UK income and gains tax at standard rates. For their first 15 years of being UK tax resident their foreign income and gains are subject to UK tax at standard rates only if they are brought to the UK (ie. the funds are ‘remitted’), provided they make a claim in their tax return and after 7 years they pay an annual charge.

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

As before, as soon as an individual becomes UK resident, their UK source income and gains subject will still be subject to UK income and gains tax at standard rates. During an individual’s first four years of UK residence, foreign income and gains will be entirely exempt from UK tax and can be brought to the UK without UK tax being payable. After that four year period, their worldwide income and gains will be subject to UK income and gains tax at standard rates.

Potential reliefs

The previous government had proposed that, in the first year of the new regime, existing remittance basis users who have been resident for more than 4 years would benefit from a 50% reduction in income tax on their non-UK source income, however the new government have confirmed that this will not happen.
The previous government had also proposed that non-doms would be permitted to ‘rebase’ the value of their personal assets, meaning that only an increase in value from 6 April 2019 would be considered a taxable gain. While the new government has confirmed that it will likely allow some type of rebasing, it has not confirmed the relevant rebasing date.
Finally, there will be a Temporary Repatriation Facility (TRF) allowing non-doms and former non-doms to bring foreign income and gains that have not yet been taxed under the current regime to the UK. The previous government proposed a 12% tax rate for income (usually up to 45%) and gains (typically 20%) on remittances made between 6 April 2025 and 5 April 2027 but the new government has confirmed that while the TRF will exist in some form, it has not yet decided applicable tax rates or duration.

Income and gains tax treatment for trusts

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.

Inheritance tax on assets held directly by individuals

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.

Inheritance tax on assets held in trust

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.

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