The landscape for non-UK domiciled individuals (non-doms) is on the brink of significant change as the Chancellor implements a shift towards a residence-based tax regime. But what challenges might this present and how can you prepare? 

Following on from the Conservative government’s initial announcement in their final budget to reform the regime for non-doms, Rachel Reeves’ recent announcement outlined Labour’s plans to make the pivotal shift from the existing remittance basis regime to a resident-based tax regime. These upcoming changes will have far-reaching implications for non-doms, including 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.

New tax regime for arrivals 

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. This basis of taxation will be discontinued from 6 April 2025. 

Introduction of a four-year tax exemption 

The proposal is that, from 6 April 2025, individuals relocating to the UK will be able to elect to exempt their foreign income and gains for the first four years of their UK tax residency, provided they were non-UK tax residents for the preceding 10 years. Such a claim will result in the loss of their personal allowance and Capital Gains Tax exemption. Labour believe this change will make the UK attractive for foreign investors to relocate to.  

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, Rachel Reeves announced 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. The rebasing date is yet to be determined (previously the Conservatives had proposed 5 April 2019).  

2. A "Temporary Repatriation Facility (TRF)". This facility will allow for the repatriation of accumulated foreign income and gains by former remittance basis taxpayers at a reduced tax rate, offering a potentially attractive method for bringing funds into the UK under the forthcoming tax regime. Previously the reduced tax rate was to be 12% for a two-year window, however Labour are yet to commit to a rate of tax or length of time for this facility.  

3. The TRF is being reviewed to potentially widen its scope such that it also includes income and gains within offshore structures (e.g. trusts), but no further commentary has been released.  

The Conservatives had outlined a further transitional relief for individuals who will be losing access to the remittance basis. The proposal was for taxpayers to benefit from a one-time 50% tax exemption on foreign income for the 2025/26 tax year, excluding chargeable gains. This has been scrapped by Labour and there has been no mention of them making an additional concession for certain UK investment income that they floated prior to the General Election.  

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 new residence-based regime for Inheritance Tax (IHT) 

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 10 years being within the scope of IHT on their worldwide assets.  

This system will also result in a 10-year” tail”, therefore keeping individuals within the scope of IHT until they have been non-UK resident for 10 years, subject to the impact of an Estate Tax Treaty between the UK and another country (e.g. UK/US). It therefore appears that an individual will remain within the scope of IHT for several years after they have left the UK, which could result in a sizeable UK IHT liability on a death arising within the 10-year tail period.  

The impact on trusts  

Non-doms are currently able to set up an Excluded Property Trust (EPT) to keep assets outside of the scope of IHT indefinitely, but this is set to end under the new rules from 6 April 2025. Labour’s aim is to ensure all long-term residents are within the scope of IHT and so it appears that EPT status might be available for settlements created on or after 6 April 2025. 

Labour have also indicated that it is their intention to bring existing EPTs created before 6 April 2025, where the settlor is the subject to IHT, into these new rules. However, the legislation relating to offshore trusts is very complicated so the government is considering how to deal with existing trusts/structures and any transitional provisions that will be needed for affected settlors. We do not expect any details on these transitional arrangements until the next budget on 30 October 2024. 

There may still be the opportunity to explore the creation of an offshore trust prior to the changes having effect and it could be good to explore the option of pilot trusts. This is subject to the inclusion of any anti-forestalling rules which could prevent such planning.   

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, as such trusts will effectively be transparent, and their income and gains assessed on the settlor.

What to expect next 

As Labour prepares to usher in a new era of taxation for non-doms, the end of the remittance basis and the introduction of a residence-based regime from 6 April 2025 will reshape the taxation landscape for many.  

While the details are still unfolding, it’s clear that these changes will have a wide-ranging impact. The next key date will therefore be the Autumn Budget on 30 October 2024, at which point the government will produce the draft legislation. This will provide a small window in which you can organise your affairs before the proposed implementation date of 6 April 2025. 

How we can help 

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.