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Non-dom no more? What do the Spring Budget's announcements mean for the UK taxation of non-UK domiciliaries?

Posted on 7 March 2024

Translations:  Saudi Flag

The Spring Budget 2024 announcements propose huge changes to the taxation of non-UK domiciled individuals (or "non-doms") living in the UK. Labour have long been proposing to reform the current regime should they win the upcoming general election, but the Chancellor beat them to it in a move which was largely unexpected until a few days ago.

As yet, the only detail we have of the changes is in HM Treasury's technical note, and we await draft legislation to fully understand the proposals. Some of the measures are subject to consultation. The changes will largely take effect from April 2025 and the next general election must take place by January 2025 at the latest (with many suggesting Autumn 2024 as the likely date, or even May 2024). So – based on current polling – it is likely the Conservatives will no longer be in power by the time their announcements take effect. Given Labour's stated views on restricting non-dom status, however, it seems unlikely they would revoke or substantially amend the proposals.

Foreign (i.e. non-UK) income and gains ("FIG")

Non-doms moving to the UK

From 6 April 2025, the remittance basis of taxation will be abolished. Instead, an individual in their first 4 years of UK tax residence (after at least 10 years of non-UK residence) will be able to elect not to pay UK tax on their FIG. There will be no restrictions on the ability to remit such FIG to the UK. Interestingly, the regime does not appear to be restricted to non-doms, so a UK domiciliary who has been non-UK resident for 10 years before returning to the UK could benefit from the rules for the first 4 years following their return. A minor disadvantage of opting to benefit from the exemption on FIG will be the loss of the personal allowance and CGT-exempt amount.

It appears that the 4-year period starts from the first year of UK residence regardless of any interruptions, so a person who is UK resident in year 1 then ceases UK residence for years 2 and 3 could claim the new regime in year 4, but not in years 5 or 6. The requirement for a 10-year period of non-UK residence in order to be eligible for the new regime could catch taxpayers who have ceased UK residence for the minimum periods necessary under current rules to 're-set' their deemed domiciled status (broadly 6 tax years) or to fall outside the temporary non-residence rules (broadly 5 calendar years).

Non-doms already in the UK

Non-doms who are already UK-resident will be eligible for the new rules if they are still within their first 4 years of UK residence. However a non-dom who commenced UK residence in or before 2021/22 will, from 6 April 2025, be subject to UK taxation on their worldwide FIG. Transitional provisions mean that for 1 year only (i.e. for 2025/26), persons who were eligible for the remittance basis but will not be eligible for the new 4-year regime will only be subject to UK tax on 50% of their foreign income (but not foreign capital gains).

For CGT purposes, personally held assets can be re-based to their 5 April 2019 value, provided the taxpayer remains non-UK domiciled and is not yet deemed domiciled at 5 April 2025.

For individuals who have claimed the remittance basis in previous years, there will be a temporary reduced 12% rate of tax on FIG remitted between 6 April 2025 and 5 April 2027. This provides an incentive to remit during those 2 years where it is known that the funds will be required in the UK. If, however, the taxpayer can meet their UK expenditure requirements from 'clean capital' or post-2025 taxed FIG, both of which can be remitted to the UK without triggering any (further) UK tax at all, it still makes sense to keep historic FIG outside the UK. It will be important to segregate pre-April 2025 FIG from post-April 2025 FIG to prevent unnecessary taxable remittances.

Application to trusts

Similar changes will be made to the taxation of FIG within trusts settled by non-doms. Currently, FIG within a 'protected settlement' settled by a non-dom to hold their non-UK assets before they become deemed domiciled and so cease to be eligible for the remittance basis of taxation, is not subject to UK tax on an arising basis, but only when a UK-resident beneficiary benefits from the trust. This protection will be abolished from 6 April 2025, including for trusts created before that date.

Instead, the FIG within such a trust will be taxed on a non-dom settlor "on the same basis as UK-domiciled settlors at present", unless the settlor is within the 4-year regime described above. UK resident and domiciled settlors are only subject to taxation on income and gains within a trust where that trust is 'settlor-interested'. In order to prevent a trust from being settlor-interested for both income tax and CGT purposes, it is necessary to exclude, amongst others, the settlor, their spouse, children and grandchildren – this will rarely be palatable. Existing protected settlements should therefore be reviewed in light of the new regime. In many cases, it may nonetheless prove desirable to retain a pre-existing settlement because of its grandfathered IHT status, as explained below, or for other estate planning reasons.

Insofar as UK-resident beneficiaries of pre-2025 protected settlements are concerned, they will continue to be subject to UK tax on benefits received from the trust by reference to pre-2025 FIG within the trust.  They will, however, no longer be able to claim the remittance basis on such sums. Trustees should consider making distributions before 6 April 2025 to UK-resident beneficiaries who are currently eligible for the remittance basis but who will not qualify for the 4-year rule if it is likely that the sum will not need to be remitted to the UK. UK resident beneficiaries eligible for the 4-year rule can receive trust benefits free of UK tax from 6 April 2025, regardless of whether that benefit is remitted to the UK. However, such benefits will not 'wash out' the FIG within the trust available to match against benefits provided to UK-resident beneficiaries who are not eligible for the 4-year rule.

Inheritance tax ("IHT")

The changes to inheritance tax remain subject to consultation, though are potentially equally wide-ranging.

It is proposed that exposure to IHT on personally held non-UK assets will cease to be determined by domicile status, instead moving to a residence-based system. It is envisaged that worldwide exposure to IHT would apply after 10 years of UK residence. In practice, given a non-dom who has been UK resident in 15 of the last 20 tax years is already subject to IHT on their worldwide assets, this will merely reduce the existing time limit for such individuals.

Conversely, it is proposed that worldwide exposure to IHT would cease after 10 years of non-UK residence. This would be a significant increase compared to the current 'tail' by which a UK deemed domiciled person ceasing UK residence can lose their worldwide IHT exposure from the start of their fourth year of non-UK residence.

The proposed new rules would potentially benefit UK-domiciled persons leaving the UK or who are already non-UK resident. It is notoriously difficult to lose a UK 'domicile of origin', such that a person originally from the UK may not cease to be UK-domiciled even after several decades of non-UK residence. In addition, the nature of the UK concept of domicile – which has evolved through case law over several centuries – means it can be notoriously difficult to determine where an internationally mobile person is domiciled or to pinpoint when their domicile status changes. The shift from a domicile-based system to a residence-based system will enable such persons to determine with absolute certainty their exposure to IHT, and may make it easier for UK domiciled persons to lose their worldwide IHT exposure.

The technical note states, however, that the consultation will include "consideration of further criteria such as other connecting factors", suggesting that the shift to a residence-based system may not be as simple as at first appears. Indeed, if a person's other connections to the UK - such as whether they have a UK home, where their family lives, where the majority of their assets are etc - were to become relevant to their IHT exposure, this could create just as much uncertainty under the new regime as under the current domicile-based regime.

It is also proposed that the IHT exposure of trusts will be reformed. Under current rules, any trust settled by a non-dom and which holds only non-UK assets is permanently sheltered from IHT, even if the non-dom settlor subsequently becomes UK-domiciled or deemed domiciled, and even if they may continue to benefit from those assets. It is proposed instead that such trusts will be subject to IHT if the settlor meets the residence criteria when an IHT charge might otherwise apply (such as on the settlor's death or on 10-year anniversaries). Importantly, any trust settled by a non-dom before 6 April 2025 will continue to benefit from permanent 'excluded property status', which creates an incentive for any non-dom who anticipates they may exceed the 10-year residency rule – whether immediately from 6 April 2025 or in the future – to settle a trust before April 2025. Going forwards, any trusts settled by family members who are both non-dom and non-UK resident may be particularly important planning vehicles where there are also UK-resident family members wishing to minimise their own IHT exposure.

Action points

So what should a UK-resident non-dom do now?

  1. Where possible, consider declaring dividends or realising capital gains on non-UK assets before 6 April 2025. Provided you are eligible for and claim the remittance basis of taxation and keep the sums outside the UK, these can be received free of UK tax.
  2. Defer making remittances of your pre-April 2025 FIG until after 5 April 2025 (but before 6 April 2027), in order to benefit from the reduced 12% rate of taxation, as opposed to up to 45% on income and 24% on capital gains.
  3. Make arrangements for your post-April 2025 FIG to be separated from your pre-April 2025 FIG on which you previously claimed the remittance basis, as remitting the latter will result in a UK tax charge whereas remitting the former will not, on the basis that it will have been taxed anyway.
  4. Review any protected settlements to determine whether it may be desirable to exclude the settlor, their spouse and potentially their children, grandchildren and each of their respective spouses from benefit before 6 April 2025 to avoid the settlor being subject to UK tax on FIG within the trust on an arising basis.
  5. Consider making trust distributions before 6 April 2025 to UK resident beneficiaries who are currently eligible for the remittance basis but who will not be eligible under the 4-year rule.
  6. Consider establishing a trust before 6 April 2025 to shelter your non-UK assets from IHT.

These announcements represent a complete reform of the UK taxation of non-doms (and indeed UK domiciliaries who are or have been non-UK resident), so all affected taxpayers should ensure they understand their future tax exposure. As always, there will be winners and losers from the new rules, but bespoke advice is the best way to ensure you are in the optimum position.


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