Abolition of non-dom regime

Old Regime

Concept of domicile and residence

Under English law, an individual’s domicile position is determined at birth and is generally based on the domicile of the individual’s father (‘domicile of origin’), provided the parents were married at the time of birth. It is adhesive and difficult to lose unless steps are taken to acquire a domicile elsewhere (‘domicile of dependency’, ‘domicile of choice’). It is the place an individual considers to be their permanent home and can, in many cases, differ to where an individual resides at a particular point in time. Residence, on the other hand, refers to where an individual is living, either temporarily or permanently, and for UK tax purposes is determined by the statutory residence test.

The concept of domicile has proven to lead to ambiguity, particularly for those who spend much of their time living and working across several jurisdictions over their lifetime.

Current non-dom regime

Under the current non-dom regime, a UK resident non-domiciled individual can limit the scope of UK tax to UK source income and gains and foreign sources only to the extent these are remitted or brought to the UK. They do so by making a claim for the remittance basis of taxation. For the first seven years of UK tax residence, the remittance basis charge can be freely claimed. Once an individual is UK resident for seven out of the previous nine tax years, a charge of £30,000 applies, which increases to £60,000 once they have been UK tax resident for 12 out of the previous 14 UK tax years. Once an individual has been UK tax resident for 15 out of the previous 20 tax years, the remittance basis no longer applies, and they are liable to UK tax on their worldwide income and gains as they arise, and their personal estate (wherever situated) is liable to UK Inheritance Tax (IHT).

New Foreign Income and Gains (‘FIG’) Regime

New arrivals

Under the new FIG regime, which takes effect from 6 April 2025, new arrivals to the UK can claim to be exempt from UK tax on FIGs during their first four years of UK tax residence, provided they have had a period of 10 years consecutive non-UK residence. During this four-year period, FIGs can be remitted freely to the UK without incurring a tax charge (although entitlement to the personal allowances and annual exempt amount for Capital Gains Tax will be lost). In the fifth year of tax residence, such individuals are liable to UK tax on a worldwide arising basis. It would appear that a returning UK domiciled individual who has had a period of 10 years of consecutive non-UK tax residence could benefit from the new regime.

Individuals who are currently UK resident and availing of the remittance basis regime

Existing UK resident and non-domiciled individuals can benefit from the new FIG regime until the end of their fourth year of UK tax residence.

Transitional rules are to apply to existing non-doms which include:

• A 50% reduction in personal foreign income subject to tax in 2025/26 for those who lose access to the remittance basis on 6 April 2025 and are not eligible for the new regime.
• The option for individuals who have claimed the remittance basis to rebase personally held capital assets to their 5 April 2019 valuation for disposals after 6 April 2025.
• A new Temporary Repatriation Facility in the tax years 2025-26 and 2026-27 which will enable individuals who had previously been taxed on the remittance basis to remit FIG’s that arose prior to 6 April 2025 at a reduced rate of 12%. A relaxation of the mixed fund ordering rules is expected to make it easier to quantify the level of FIGs.
• A removal of Trust protections for FIGs arising in non-resident trusts from 6 April 2025 for individuals who have been UK tax resident for four years and as such are not eligible for the new FIG regime. This means that for settlor interested Trusts (broadly speaking Trusts whereby the settlor, his spouse or minor children can benefit), the settlor will be taxed on the income and gains of the structure as they arise with effect from 6 April 2025.

Inheritance Tax

The current regime for IHT is based on the domicile of the individual and the location of assets. Currently any non-UK situs assets held by a UK resident and non-domiciled individual are outside the scope of UK IHT. The government will consult on how best to move the regime to one based on residence. They will consult on a 10-year exemption period for new arrivals and a 10-year ‘tail-provision’ for those who leave the UK and become non-resident. No changes to IHT will take effect before 6 April 2025. The consultation will include ‘consideration of further criteria such as connecting factors’, suggesting the change to a residence-based system is not as simple as it initially appears.

To provide certainty on offshore Trusts, the government have confirmed that where non-UK assets are settled into a Trust by a non-UK domiciled settlor prior to April 2025, these assets will continue to be protected from UK IHT.

Overseas workday relief (‘OSW relief’)

OSW relief is available to UK resident non-domiciled eligible employees during their first three years of UK tax residence. It allows relief from UK tax for non-UK workdays, provided the funds relating to the offshore element are maintained offshore. The government announced their intention to simplify the relief. It will be linked to a claim for the new FIG regime meaning if individuals are not eligible for the new FIG regime, they are not eligible for OSW. The new OSW relief will provide relief from income tax whether or not the foreign earnings are brought to the UK.

Business Investment relief (‘BIR’)

No changes are currently proposed to BIR which will be available for qualifying investments of pre-5 April 2025 FIGs made on or after 6 April 2025, and will continue to be available for qualifying investments made prior to 6 April 2025.

Conclusions

While simplification of the regime is welcome, many questions remain around the transitional arrangements and how these will operate - not least the issue of IHT which is to be consulted on in due course. Individuals subject to the transitional rules will potentially be operating under several sets of tax rules which means greater complexity for this group. Those with offshore Trust structures should review their position and take the appropriate action.

UK resident non-domiciled individuals have a limited window within which to organise their affairs and maximise tax efficiencies. The Temporary Repatriation Facility which enables historic FIG to be remitted at a rate of 12% is generous, particularly for those whose intend to stay in the UK long term. It remains to be seen if the changes continue to attract wealthy individuals and talent to the UK or whether the UK will lose its appeal.

With a UK election imminent and a possible change to a Labour Government, there remains a lot of uncertainty for non-doms. However, given Labour’s much publicised view on reforming the regime, it is unlikely that there will be substantial changes to the current Conservative proposals. Existing UK resident non-doms should seek bespoke advice to understand how the proposed changes impact them.

For further information, get in touch with Jennifer McNally or your usual Crowe contact.