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Aug 14, 2024

New tax regime targets non-doms

The UK’s non-domiciled (non-dom) individuals will face a significantly stricter tax environment starting in April 2025, as the Government plans to overhaul the current system. Described as “outdated,” the non-dom tax advantage will be phased out, with new regulations focusing on inheritance tax (IHT) and the treatment of foreign income.

Inheritance tax changes

One of the most significant changes will be replacing the current domicile-based inheritance tax (IHT) system with a residence-based system, effective from 6 April 2025. Under the new rules, any non-dom who has been a resident in the UK for the past 10 years will fall within the scope of UK IHT. This change will impact the property and assets subject to UK IHT for both individuals and trusts.

Importantly, these rules will not be applied retrospectively. Therefore, the new legislation will not affect deaths occurring before the effective date. Despite the sweeping nature of these reforms, the Government has decided against further public consultation, opting instead to build on responses from the earlier Conservative non-dom consultation.

The Chancellor, Rachel Reeves, has acknowledged the potential risk of a mass exodus of wealthy non-doms before the new rules take effect. However, she emphasised that the Government is committed to eliminating what it views as an antiquated concept of domicile status. She insists that the new tax system will be internationally competitive and designed to attract top talent and investment to the UK.

No transition relief under new rules

In contrast to the transitional reliefs proposed by the former Conservative Chancellor, the Government will not offer a 50% reduction in foreign income tax for individuals who lose access to the remittance basis in the first year of the new regime. Instead, the government plans to end what it perceives as residual advantages for current non-doms.

However, there will be a four-year foreign income and gains (FIG) regime, offering 100% relief on foreign income and gains for new arrivals to the UK in their first four years of tax residence. This benefit will only apply to those who have not been UK tax residents in any of the 10 consecutive years before their arrival. UK residents who do not qualify for this regime or opt not to claim it will be liable to capital gains tax (CGT) on foreign gains as usual.

For current and former remittance basis users, the Government will allow the rebasing of foreign capital assets to their value at the rebasing date, which will be specified in the upcoming Budget. This means that when these assets are disposed of, they will be taxed based on their value at the rebasing date, potentially reducing the taxable gain.

Temporary repatriation facility and anti-avoidance review

Additionally, a new temporary repatriation facility (TRF) will be introduced for individuals who have previously been taxed on a remittance basis. This facility will allow them to remit foreign income and gains that arose before 6 April 2025 at a reduced tax rate for a limited period after the remittance basis ends. The Government intends to make this option as attractive as possible, with specific rates and timeframes to be announced in the Budget statement on 30 October.

The Government is also exploring the possibility of extending the TRF to include stockpiled income and gains within overseas structures, with further details to be confirmed later.

Lastly, offshore anti-avoidance legislation, including the transfer of assets abroad and settlements rules, will be reviewed to ensure these measures are effective and straightforward to apply. The review aims to eliminate ambiguity and uncertainty within the current legislation. While changes are not expected before April 2026, the Treasury has left room for potential adjustments in the 2026/27 tax year.

The Government will retain a form of Overseas Workday Relief (OWR), with further details to be disclosed in the Budget.

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