The abolition of the non-dom regime

New tax regime for new arrivers

Abolishment of the remittance basis for tax years beyond 2024/25

The term 'non-dom' refers to individuals who, despite residing in the UK, have their permanent home or domicile outside of the UK. Currently, non-UK domiciled individuals, who haven't been UK residents for more than 15 out of the past 20 tax years, can opt to be taxed on the remittance basis, which means they are only taxed on their UK-sourced income and gains, plus any foreign income and gains they bring into the UK. The remittance basis of taxation will be discontinued from 6 April 2025.

Introduction of a four-year tax exemption

From 6 April 2025, individuals relocating to the UK will be able to elect to limit their UK tax exposure on foreign income and gains (FIG) for the first four years of their UK tax residency provided they were non-UK tax residents for the preceding 10 years but with the loss of their personal allowance and capital gains exemption. The government believe this will attract foreign investment and spending in the UK by making it financially beneficial for these individuals to relocate their FIG into the country.

Transition to standard tax treatment

After the initial four-year period, these individuals will be taxed on their worldwide income and gains. The new system simplifies the tax treatment of foreign income and gains, which will no longer be taxable upon remittance to the UK.

Transitional provisions

In light of these significant changes, the Chancellor has announced some transitional measures to mitigate the impact on current remittance basis taxpayers:

1. A rebasing option for the personal non-UK capital assets of existing remittance basis users to their 5 April 2019 values for disposals occurring from 6 April 2025 onwards. This adjustment will not apply to trust-held assets.
2. For individuals who will be losing access to the remittance basis after the 2024/25 tax year, a one-time 50% tax exemption on foreign income for the 2025/26 tax year, excluding chargeable gains.
3. A two-year "Temporary Repatriation Facility" during the 2025/26 and 2026/27 tax years, allowing for the repatriation of accumulated foreign income and gains by former remittance basis taxpayers at a reduced 12% tax rate, offering a potentially attractive method for bringing funds into the UK under the forthcoming tax regime.

These changes will present planning opportunities ahead of 6 April 2025 and beyond, but the devil will be in the detail as we await the release of draft legislation providing more clarity on how the new rules will work.

The impact on trusts and Inheritance Tax changes

The reform addresses Inheritance Tax (IHT), which currently hinges on an individual's domicile status and the location of their assets. The government plans to consult on shifting IHT to a residence-based regime with a view to:

• Bringing somebody’s worldwide assets into the scope of IHT once they have been UK resident for 10 years.
• Keeping those people within the scope of IHT until they have been non-UK resident for at least 10 years. 
• Ensuring that non-UK assets placed into a trust by non-doms before April 2025 remain outside of the scope of UK IHT. 

We expect a lot of offshore trusts to be established in the next year as a result and it could be good to explore the option of pilot trusts. It is important to note that an election could be called at any time with just 25 days notice and therefore it is important to get ahead of the game in case of any change in government.

The changes will, however, eliminate the status of protected trusts (for Income Tax and Capital Gains Tax purposes), raising significant worries among taxpayers who established trusts before they were considered domiciled in the UK for tax purposes.

Again, we will have to wait for further details and legislative drafts before we have a clear picture on the implications of these reforms. A review of individual circumstances will be crucial in ensuring the correct approach is taken before 5 April 2025.

While we await the technical details of the changes, it is a great chance to reflect on your existing circumstances and intentions in the short and longer term. By undertaking this thought process now, you should be better placed to plan for the new rules and to be able to react more quickly and thus take advantage of any opportunities when the operation of the rules are released. For example, we are currently speaking with our clients to consider their UK funding requirements (including extraction from existing trusts/companies), succession planning and their timescale for leaving the UK.   

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