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In a headline and groundbreaking move, the Chancellor announced in the Spring Budget 2024 that non-UK domiciled (“non-dom“) status will be abolished from April 2025. It will be replaced by what he referred to as a “modern, simpler and fairer” system, which will be based on tax residency as opposed to domicile.
The current domicile regime
This represents a significant change in the UK tax, private wealth, and estate planning framework where non-dom. status, and the favourable tax treatment that comes with it, has played an important role since the 1800s. In broad terms, domicile can be summarised as an individual’s “permanent home”, or where they intend to remain permanently and indefinitely. It goes beyond tax residence, meaning that an individual can be tax resident in the UK but domiciled elsewhere, such people are referred to as “UK res. non-doms“. They are able to claim the remittance basis of taxation, meaning that unlike a domiciled UK tax resident, they are subject only to UK tax on their UK source income and gains and their foreign income and gains (FIGs) that they ‘remit’ to the UK. The deemed domiciled rules (applying where the individual has been UK tax resident for 15 out of the last 20 years) act as a statutory limitation on the ability to claim the non-dom. tax status. Arguments for this regime cite that it encourages inward investment into the UK due to the immigration of wealthy and entrepreneurial non-domiciled individuals.
The new residency “new arrival” regime
At the time of writing, we only have the government’s short policy summary and technical note to work with for understanding the abolishment and the regime that will replace it, which still leave a number of questions unanswered. The summary states that the concept of domicile is “outdated and incentivises individuals to keep income and gains offshore”. It will be replaced by a residency-based system whereby new arrivals will benefit from a 100% UK tax relief on FIGs for the first four years that they are UK tax resident. They will also not pay tax on the receipt of distributions from non-resident trusts either. After those four years, they will be taxed just the same as any other UK tax resident on their UK and worldwide foreign income and gains.[1] Here are some of the key points:
1. ‘New arrivals’ – this refers to those individuals who have had at least 10 years of consecutive non-residence status. This therefore means that a 10-year period of non-residence is required to ‘reset’ the clock to be able to claim the four-year new arrival status again. Currently, a period of six years of non-residence is required to lose deemed-domiciled status for income and CGT purposes so that the remittance basis can be reclaimed.
As clarified by the technical note, the Statutory Residence Test will be used to determine tax residency; treaty residence (under the relevant double tax agreement) and split years will be ignored.
If an individual leaves the UK temporarily during the four-year period they will still be able to make a claim under the new regime for any of the qualifying tax years remaining on their return to the UK.
2. Annual claim and blanket application – Currently an individual must actively claim the remittance basis in their tax return for their FIGs to be outside the scope of UK tax. Where the ‘remittance basis user’ brings any of their FIGs into the UK, it will then be subject to UK tax. Under the new regime, qualifying individuals will still need to claim the four-year relief on an annual basis. As per the technical note, individuals do not have to make the claim each year (just like the remittance basis). For example, making a claim in year one of tax residency, then choosing not to for year two, will not prevent them from making a claim in years three and four.
Notably, and where the four-year exemption goes further than and simplifies the current remittance basis regime, bringing (or ‘remitting’) FIGs into the UK will not trigger any UK tax during that period. As the note states, individuals will not be required to track the movement of their FIGs through investments as they currently have to under the remittance basis regime.
3. Transitional period – Recognising that this represents a drastic change from the current regime for current non-doms, there will be:
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- A temporary 50% reduction in the personal foreign income subject to tax in the 2025/26 tax year for those who will lose access to the remittance basis on 5 April 2025 and are not able to claim the new four-year exemption regime.
- Re-basing of capital assets to 5 April 2019 levels for disposals that take place after 6 April 2025 for current non-doms who have claimed the remittance basis. Such individuals would have already been subject to CGT on the disposal of UK assets, but in many cases would have expected disposals of foreign assets to be outside the scope of UK CGT.
- Non-doms will be able to remit FIGs that arose before 6 April 2025 to the UK at a rate of 12% under a new temporary facility in the tax years 2025-26 and 2026-27.
4. Inheritance tax – Currently (and as has been the case for many years), individuals who are non-UK domiciled are only subject to UK inheritance tax (IHT) on their UK assets. The deemed domiciled rules limit how long an individual can enjoy this benefit where they have been in the UK long-term (i.e. 15 out of the previous 20 years). This applies regardless of whether the individual claims the remittance basis. The policy does not currently change this, although it announced that it will be consulting on the best way to move IHT to a residence-based regime. The technical note envisages that the new rules will involve charging IHT on worldwide assets owned outright when a person has been resident in the UK for ten years, with a provision to keep a person in scope for 10 years after leaving the UK. This remains subject to the consultation, which will be a key area to watch.
What about offshore trusts?
Domicile status is particularly relevant to the establishment of non-UK resident discretionary trusts, and the tax treatment afforded to them. In broad terms, where a non-UK domiciled individual settles non-UK assets onto a non-UK trust (i.e. with overseas trustees), those assets remain outside the scope of UK IHT, even if the person who created the trust subsequently becomes UK domiciled or deemed domiciled. The policy reassures us that this IHT treatment for non-UK assets will continue to apply for such trusts established prior to April 2025, meaning that we can expect an uptick in interest in the set-up of these trusts (which had commenced even before the budget announcements).
These same trusts have also enjoyed favourable treatment for UK income tax and CGT, where (again, in broad terms) FIGs arising within the trust are only subject to UK tax when distributions are made to UK resident beneficiaries. The government has been much harsher here compared to IHT, as the policy states, this protection from tax within settlor-interested trusts will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the new four-year FIGs regime. FIGs arising in the trust (whenever established) from 6 April 2025 will be taxed on the settlor on the same basis as UK domiciled settlors, unless the settlor is eligible for the new four-year FIG regime. Only FIGs that arose prior to 6 April 2025 will not be taxed unless distributions or benefits are paid to UK residents who have been here for more than four years.
What next?
These substantial changes will affect a number of individuals and impact how they decide to structure their wealth going forwards. It will be imperative for those affected to take advice on the best course of action, and the steps required to be taken prior to 6 April 2025.
[1]Note that where an individual is tax on the same income or gains in two jurisdictions, this will usually be subject to relief under the relevant ‘double tax agreement’ to prevent double taxation.]
This article was updated 14/03/2024.
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