Chancellor Jeremy Hunt used the Spring Budget 2024 to propose huge changes to the taxation of non-UK domiciled individuals ("non-doms") living in the UK. In this note, we set out the key points arising out of these changes that may be relevant to potential purchasers of UK property.
What are non-doms?
Non-doms are people who are "domiciled" outside the UK, broadly meaning that the UK is not their permanent home, but who live here for at least part of the year. Currently, non-doms are able to shelter their foreign income and gains ("FIG") from UK tax by keeping these funds outside the UK. They pay UK tax on FIG they bring into the UK under the 'remittance basis'.
What is changing?
The Government has announced it intends to abolish the non-dom regime altogether and bring in a new residence-based tax regime. With effect from 6 April 2025, people arriving in the UK (after at least 10 years of non-UK residence) will not have to pay UK tax on their FIG for the first four years of UK tax residence. After the expiry of this four year period, such individuals will be subject to UK tax on their worldwide FIG whether or not they are brought into the UK. Certain transitional reliefs will be available in 2025/26 and 2026/27.
Whilst UK inheritance tax ("IHT") exposure in respect of non-UK assets will change, it appears the IHT position in respect of the ownership of UK residential property will remain the same; All owners, whether domiciled or non-domiciled under the current rules, or able to benefit from the new four year regime or not, will continue to be exposed to UK IHT in respect of UK residential property.
What does this mean for buyers of UK real estate?
Buyers of UK property who do not become resident in the UK will be unaffected by these changes. However, it is important that they take advice as to how exactly how many days they are able to spend in the UK in each year without inadvertently becoming UK tax resident.
Buyers intending to move to the UK for the first time may be in a better position under the new regime. They need no longer be concerned around the source of funds they bring to the UK (e.g. to purchase the property or to fund their ongoing expenditure in the UK) as they will be able to bring FIG into the UK tax-free for their first four years of tax residence. This represents a welcome simplification compared to the current position.
However, any buyers intending to make a longer-term move to the UK should carefully consider the full implications of such a relocation on their worldwide assets. Staying in the UK for more than four years will subject their worldwide FIG to UK tax, and staying more than ten years will bring their entire worldwide estate within scope of UK inheritance tax. This will have significant ramifications on their international tax position, which should be considered with their advisors.
Parents buying properties for their children to live in should seek advice ahead of any such purchase around the optimum ways to fund this, and to understand their options for mitigating UK inheritance tax exposure.
Can you give me some examples?
A Middle East investor intends to purchase a super prime property in Mayfair to let out and (eventually) realise capital growth. They will not be affected by these changes on the basis that they will not become UK tax resident. The tax landscape applicable to UK residential property for non-residents remains largely unchanged, save that gains on the disposal of UK residential property will now be taxable at 24% from 6 April 2024, rather than 28%.
A couple resident in Singapore intend to purchase a pied à terre in Knightsbridge to occupy whilst they are in London for 2-3 months of the year. This couple may be affected by the changes depending on the number of days they will spend in the UK and their ties to the UK. They should seek advice to ensure they know how to limit their day-count in the UK.
An American entrepreneur intends to purchase a flat in Hampstead for his daughter to live in whilst she studies in the UK. He will also stay in the property when he visits London. US persons are in a unique position – they may be able to be more relaxed about the upcoming changes because of the imposition by the US of worldwide taxation on its citizens regardless of their residence. Therefore, this entrepreneur may be able to spend more time in the UK and mitigate his exposure to global taxes.