The landscape for non-UK domiciled individuals (‘non-doms’) has significantly changed as the Chancellor confirmed the shift towards a residence-based tax regime. But how can you take advantage of its opportunities while preparing ahead for the challenges?
Rachel Reeves’ recent Budget confirmed Labour’s plans to make the pivotal shift from the existing remittance basis regime to a residence-based tax regime with effect from 6 April 2025. These upcoming changes will have far-reaching implications for non-doms, in areas such as Inheritance Tax (IHT) and offshore trusts. While there may be challenges ahead for those impacted by these changes, there will also be opportunities, and it is important to take steps to prepare.
The changes being brought in for offshore trusts/settlements could also impact you. Our separate article regarding the offshore trust changes covers the key points to consider.
A brief summary of the non-dom changes
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. This remittance basis will be abolished from 6 April 2025.
Instead, from 6 April 2025, individuals will be able to elect to exempt their Foreign Income and Gains (FIG), for the first four years of their UK tax residency, regardless of whether these funds are brought into the UK. This exemption applies provided they were not UK tax residents in the preceding 10 years. Such a claim will result in the loss of their personal allowance and Capital Gains Tax (CGT) exemption.
After the initial four-year FIG exemption, all individuals will be taxed in the UK on their worldwide income and gains, with credit for foreign taxes paid where appropriate.
The government will be introducing some transitional measures to mitigate the impact on current remittance basis taxpayers:
A "Temporary Repatriation Facility (TRF)" to allow former remittance-basis taxpayers to repatriate accumulated foreign income and gains at a reduced tax rate of 12% in 2025/26 and 2026/27, rising to 15% in 2027/28. This offers a potentially attractive method for bringing funds into the UK under the forthcoming tax regime.
The TRF can include income and gains arising within offshore structures (e.g. trusts) prior to 6 April 2025.
A rebasing option for the personal non-UK capital assets of existing remittance basis users. The rebasing date is 5 April 2017.
These transitional reliefs will present planning opportunities for those affected ahead of 6 April 2025 and beyond.
From 6 April 2025, the government will introduce a residence-based system for IHT, which will result in anyone who has been resident in the UK for at least 10 out of the previous 20 tax years being within the scope of IHT on their worldwide assets.
This system will result in a ‘tail’ of up to 10 years for those who have left the UK. It will keep individuals within the scope of IHT depending on how long they were resident for and subject to the impact of an Estate Tax Treaty between the UK and another country (e.g. UK/US). Individuals can remain within the scope of IHT for several years after they have left the UK, which could result in a sizeable UK IHT liability (with a current rate of up to 40%) on a death arising within the tail period of up to 10 years.
There are transitional rules for those who leave the UK and break UK tax residence prior to 6 April 2025.
Scenario 1: Are you going to arrive in the UK for the first time?
You should qualify for the FIG regime and be able to exempt your foreign income and gains arising within your first four years of UK tax residence. You will be able to bring any foreign income and gains to the UK without additional tax charges.
Your UK assets will be within your chargeable UK estate, but your non-UK assets will be outside the scope of UK IHT until you have been UK resident for 10 out of the previous 20 tax years.
The transitional provisions will not apply to you. Still, there will likely be planning opportunities prior to you reaching the end of the four-year FIG regime, and ahead of your worldwide estate being brought into the scope of UK IHT.
Scenario 2: Are you returning to the UK?
Even if you previously lived in the UK (e.g. a UK citizen returning after a period working overseas), if you meet the non-residence conditions then you can benefit from the incoming FIG and IHT regimes.
To qualify for the FIG regime on your return, you must have been non-UK resident for 10 consecutive tax years. It will be key to consider the 10 tax years prior to your arrival date carefully, as UK residence in just one or those years would disqualify you from the FIG regime. Any areas of doubt should be properly reviewed, as the tax at stake in the four years following your return to the UK could be substantial depending on your level of FIG in these years.
There will likely be planning opportunities prior to you reaching the end of the four-year FIG regime and ahead of your worldwide estate being brought into the scope of UK IHT.
Scenario 3: Have you recently arrived in the UK?
If you became UK resident after 6 April 2022, you could still qualify for the new FIG regime for at least one tax year and exempt your FIG from UK tax for that period.
It should be noted that if you were resident for only part of a tax year (under split-year treatment) or you have been dual resident, these count as full tax years of UK residence for the purpose of the four year FIG regime.
There may be planning opportunities under the TRF to enable you to bring monies previously subject to the remittance basis to the UK at the reduced tax rate of 12%. Delaying remittances to 2025/26, where possible, could lead to considerable tax savings. There may also be opportunities for you prior to reaching the end of the four-year FIG regime.
It is not too late to make a claim for the remittance basis in respect of the current (2024/25) or a prior tax year. A claim can be made up to four years after the end of the tax year it relates to (e.g. a claim for 2020/21 can be made up until 5 April 2025) to take advantage of the TRF or the 5 April 2017 capital rebasing relief.
Scenario 4: Have you been UK resident already for four or more tax years?
For those who have been continuously UK resident since the 2021/22 tax year or earlier, the remittance basis will be abolished, and you will not have access to the new FIG regime. You will therefore be assessed in the UK on your worldwide income and gains from 6 April 2025 (although if you are deemed UK-domiciled this would already be the case).
It will be important for you to consider whether you have been UK resident for 10 out of the previous 20 tax years, as if so your worldwide assets will be brought within the scope of UK IHT from 6 April 2025 (again this may already be the case if you are deemed UK-domiciled). Your UK assets will be within your chargeable UK estate, as they are under the existing rules.
As above, there may be planning opportunities under the TRF to enable you to bring monies previously subject to the remittance basis to the UK at the reduced tax rate of 12%. Delaying remittances to 2025/26, where possible, could lead to considerable tax savings.
It may also not be too late to make a claim for the remittance basis in respect of the current (2024/25) or a prior tax year. A claim can be made up to 4 years after the end of the tax year it relates to (e.g. a claim for 2020/21 can be made up until 5 April 2025) to take advantage of the TRF or the 5 April 2017 capital rebasing relief.
In addition, there may be actions to mitigate your increased exposure to UK IHT if your worldwide estate is set to come within the scope of UK IHT, which could be from 6 April 2025, depending on your period of UK residence.
Scenario 5: Will you soon be leaving the UK?
Breaking UK tax residence from 6 April 2025 would avoid you being taxable in the UK on your worldwide income and gains. There could also be considerable IHT benefits from ceasing to be UK resident in the remainder of the 2024/25 tax year or in the 2025/26 tax year.
This is because under transitional rules, the IHT tail (which keeps you within the scope of UK IHT on your worldwide assets) could be much shorter than under the new residence-based IHT rules.
The transitional rules for IHT apply if:
You cease to be resident in 2024/25 or 2025/26, and
Were non-UK domiciled under common law (including if you were deemed UK domiciled) on 30 October 2024.
In this case, the tail under the residence-based IHT rules will not apply and instead, the current rules will remain i.e. you will cease to be chargeable from UK IHT on your non-UK assets from the start of your fourth consecutive year of non-UK residence. This could reduce the IHT tail significantly for those who would have a 10 -year tail under the new provisions.
If you return to the UK in the future, the new residence-based IHT rules will apply, and the temporary-non-residence rules, which can tax certain income and gains immediately on return, may need to be considered.
You will need to take care when planning your departure and ensure you properly break UK tax residence based on the number of days you spend in the UK each year and your connections to the UK going forward.
What to expect next
Following the Budget, draft legislation for these changes was released and has been debated in Parliament. The final legislation is expected to be enacted in early 2025, but no major changes are expected.
This provides a relatively short window in which you can organise your affairs before the implementation date of 6 April 2025.
How we can help
It is vital to review your circumstances, understand your exposure under the new rules, and take advantage of any opportunities that may exist.
Part of this review process will be to reflect on your existing circumstances and intentions in the short and longer term. 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 living in the UK.
If you have been impacted by the announcements in the Budget, and require professional advice or support to work out your next steps, please fill out the form below and one of our experts will be in touch to discuss your requirements. Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided.
