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UK’s New Tax Rules for Non-Doms

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Are you a non-dom living in the UK? Are you confused about the government’s recently announced changes to the tax rules for non-doms? You’re not alone. The proposed reforms represent a major shakeup to a complex system that has been the subject of much political debate in recent years. Don’t worry – we’ll explain everything so you’ll know exactly what’s changing, who’s affected, and what you need to do to prepare.

Let’s start with the basics. In the UK tax system, a “non-dom” is someone who lives in the UK but has a permanent home, or “domicile,” outside of the UK. Non-doms can access special tax rules that allow them to avoid paying UK tax on their foreign income and gains, as long as they keep that money outside the UK. This system has attracted many wealthy individuals to live in the UK over the years.

However, the current rules have faced criticism for being overly generous and unfair to taxpayers who don’t have the luxury of a foreign domicile. There have been growing calls for reform from politicians and the public. So it didn’t come as a huge surprise when Chancellor Jeremy Hunt announced in the Spring Budget that the current non-dom tax regime will be abolished in April 2025 and replaced by a new system.

Out with the old, in with the new. So what exactly is changing? Under the current rules, non-doms can access special tax benefits for up to 15 years of residing in the UK. They only have to pay tax on their UK income and on any foreign income they bring into the UK, known as the “remittance basis“. After being resident in the UK for 7 out of the last nine years, they have to start paying an annual fee of £30,000 to maintain this treatment. After 12 out of 14 years, the fee goes up to £60,000 per year.

From April 2025, this will all be replaced by a new “Foreign Income and Gains” (FIG) system. Under FIG, non-doms will only be able to avoid UK tax on foreign income for up to 4 years of UK residence, not the current 15 years. To qualify, they’ll need to have been non-resident in the UK for at least ten consecutive years before moving to the UK. After living in the UK for four years, they’ll lose the ability to claim tax benefits and will have to pay UK tax on their worldwide income and gains.

The new system aims to simplify some of the complexities of the old rules. Non-doms will still have to claim FIG treatment each tax year, but there won’t be any fees to pay like the current £30,000 or £60,000 charges after a certain number of years. The trade-off is that anyone wanting to access FIG will have to give up their UK personal allowance and CGT exemption for that year.

Importantly, the way non-doms’ UK tax residence status is determined each year will be based purely on the statutory residence test (SRT). Concepts like treaty non-residence and split years will be disregarded for FIG. This adds some welcome clarity, as the SRT is already a well-established and understood test.

Transitional rules and reliefs Of course, with any big tax change, there need to be transitional rules to smooth the journey from the old system to the new. The government hasn’t forgotten about this, though some of the proposals are already proving controversial.

Non-doms already living in the UK as of April 2025 will be able to transition into FIG as long as they’ve been UK resident for less than four years at that point. So, if you moved to the UK in 2021, you’ll still be able to claim 4 years under FIG until 2029.

There will also be transitional rules for current non-doms who have been living in the UK for longer than four years. In 2025/26, the year of transition to the new system, they’ll only have to pay tax on 50% of their foreign income (but 100% of foreign capital gains). Some are calling this a generous tax break to soften the blow of losing non-dom status. The Labour Party has already said they will abolish this 50% exemption if they win the next election.

Another transitional measure is the 2-year “temporary repatriation facility” from April 2025 to April 2027. Under this, any foreign income or gains brought into the UK that arose in a previous year when the remittance basis was claimed will only be taxed at 12% instead of the usual rates. Again, this looks to be a concession to current non-doms who want to start moving money into the UK once their non-dom status ends. But there’s a big caveat – the 12% rate only applies to income and gains held personally, not in an offshore trust.

Speaking of offshore trusts, one key perk of being a non-dom has been the ability to keep income and gains in an offshore trust without triggering UK tax, even if the individual can benefit from the trust. From April 2025, anyone who doesn’t qualify for FIG will lose this protection, meaning the income and gains in their offshore trusts will be taxed on them personally. This is a significant change that will require many non-doms to review their offshore structures.

A final transitional measure to note is “rebasing” relief for personally held foreign assets. Current non-doms will have a one-off opportunity in 2025/26 to rebase foreign assets to their value as of April 2019. This means they’d only pay capital gains tax on any increase in value from that point onwards once they start being taxed under the normal UK rules. It’s a free step-up on a tax basis, but it doesn’t apply to assets held in offshore trusts.

Reforms to IHT and OWR It’s not just income tax and CGT that are being reformed for non-doms. The Chancellor also announced a planned overhaul of the inheritance tax (IHT) rules. Currently, IHT is based on a person’s domicile status rather than where they live. After April 2025, it will shift to a residence-based system, much like income tax.

The proposal is that once a non-dom has lived in the UK for more than ten years, their worldwide estate would be subject to 40% UK IHT, not just their UK assets. Furthermore, they’d remain liable to IHT for ten years after leaving the UK – a “tail provision” to stop people moving abroad to avoid it. The rules for trusts are still to be ironed out but will likely depend on whether the settlor meets the 10-year residence criteria.

In more positive news, the current “overseas workday relief” rules that give non-doms a tax exemption for work duties performed outside the UK will remain in place. Many non-doms rely on this relief, so retaining it is a welcome decision.

What does all this mean for non-doms? If you’re currently a non-dom happily claiming the remittance basis, the new rules mean you’ll need to start planning for a future where those benefits won’t exist. Those who have recently moved to the UK will at least have a 4-year grace period under FIG. However, longer-term non-dom residents have some big decisions to make.

Consider channelling overseas income and gains into the UK over the next couple of years to take advantage of the temporary 12% remittance rate. However, for many, other factors like exchange rates and political stability in your home country may dictate that timing. Either way, it’s crucial to start planning for how and when to remit before the old rules disappear completely.

Offshore trusts are another key area to examine. If the settlor can’t personally claim non-dom or FIG status, the tax protections for trust income and gains will disappear in April 2025. That might mean considering winding up or restructuring existing trusts. Seeking professional advice is essential to avoid any traps.

Finally, although the IHT reforms aren’t due to take effect for a couple of years, they warrant some long-term estate planning. Non-doms need to consider the impact of becoming deemed UK-domiciled for IHT once they’ve lived in the UK for ten years.

What’s the bottom line? The UK is certainly becoming a less hospitable tax environment for non-doms, at least compared to the generous rules of old. But it’s not all doom and gloom—the new FIG system still allows four years of tax benefits, and transitional measures will soften the impact of the changes.

Whether the reforms end up driving non-doms away from the UK remains to be seen. Government statistics show that the number of non-doms staying for more than a year has already been declining. A cynic would say the new rules are at least partly a political move to quell public disquiet about a perceived unfair system that benefits the global elite.

Non-doms – like all taxpayers – will have to carefully weigh the costs and benefits of continuing to reside in the UK. But with some proactive planning and good advice, there are still opportunities to manage your affairs tax-efficiently while enjoying the many benefits of UK life.

The key is to start that planning process now while there’s still time to optimize your position and prepare for the brave new world of April 2025. The clock is ticking!

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