After several days of increasingly feverish speculation, Jeremy Hunt announced in the Spring 2024 Budget that from 6 April 2025, the current tax regime for non-domiciled UK resident individuals will be abolished and replaced with a generous but much shorter term regime for new arrivers to the UK based solely on residence.
There are two important points to stress about the analysis which follows.
First, the changes announced yesterday are a long way from being enacted into law. All we have to go on for the time being is a short policy summary and technical note published yesterday. The government has said that draft legislation will be published at some point “later in the year”.
Second, it is a constitutional certainty that there will be a UK general election no later than 28 January 2025. If there is a change of government, the incoming government could introduce different rules before 6 April 2025.
In short, it will be some time before there is any certainty about the proposed changes.
The current non-dom regime
Before we analyse the new regime, it is helpful to summarise the current non-dom regime.
The normal tax regime for UK resident individuals is the “arising basis”: the individual’s worldwide income and gains are taxed in the UK as they arise. However, UK resident individuals who are domiciled outside the UK can elect to be taxed on the “remittance basis”: UK source income and gains are taxed in the UK as they arise but foreign income and gains are only taxed if and when they are brought into the UK.
The regime has undergone a series of changes in recent years.
In April 2008, the “remittance basis charge” was introduced; non-doms who had been UK resident for 7 of the past 9 tax years had to pay a flat rate annual charge of £30,000 to continue to benefit from the remittance basis. Ironically, the remittance basis charge was initially proposed by the Conservatives in opposition and the idea was almost immediately adopted by the then Labour government. In April 2012, a higher charge of £50,000 (since increased to £60,000) was introduced for non-doms who had been resident for 12 of the past 14 tax years and in April 2015, a £90,000 charge was introduced for non-doms who had been resident for 17 of the past 20 tax years (although this soon became redundant).
However, the biggest change took effect from April 2017, when the concept of “deemed domicile” was extended to include not only inheritance tax but also income tax and capital gains tax. Since then, non-doms who have been resident in the UK for 15 of the past 20 tax years are treated as being UK domiciled for tax purposes and so cannot elect to be taxed on the remittance basis.
To soften the blow of the new deemed domicile rule, the “protected settlement” regime was also introduced in April 2017. The UK has complex anti-avoidance rules which tax a UK resident settlor of an offshore trust structures personally on income and gains arising in the structure if the settlor retains an interest in the trust. However, since April 2017, non-dom UK resident settlors are not taxed on foreign income and gains arising in offshore trust structures (unless or until they receive a benefit from the structure); this applies even after the settlor has become deemed domiciled in the UK, provided that the settlor does not “taint” the trust by adding value after becoming deemed domiciled. Put simply, since April 2017 it has in effect been possible for a non-dom who has become deemed domiciled in the UK to continue to benefit from a form of the remittance basis for assets held in trust.
The new regime for new arrivers
From 6 April 2025, an individual who becomes tax resident in the UK for the first time (or after a period of at least 10 years of non-UK residence) will pay no UK tax on foreign income or capital gains arising in the first four years of tax residence (even if those funds are brought into the UK). Unlike similar regimes in other jurisdictions (such as Italy), there will be no charge to benefit from the new regime. From the fifth year of tax residence onwards, the special regime will fall away and the individual’s worldwide income and gains will be taxable in the UK as they arise in the normal way.
The new regime for recent arrivers
An individual who has been tax resident in the UK for fewer than four years on 6 April 2025 (and who had not previously been UK resident or had been non-UK resident for at least 10 years before the current period of residence began) will be eligible for the new regime for the remainder of the four year period.
Non-doms who have been UK resident for four or more years on 6 April 2025 but have not become deemed domiciled before that date
The new regime will not apply to these individuals, so from 6 April 2025, they will no longer be eligible for the remittance basis of taxation. Their worldwide income and gains will therefore be taxable in the UK as they arise, subject to two special rules.
- First, for the 2025/2026 tax year only, they will pay UK tax on only 50% of any foreign income arising in that year.
- Second, from the 2025/2026 tax year onwards, if they dispose of an asset which they held personally at 5 April 2019, they will be able to elect to rebase that asset to its value at that date for CGT purposes.
These individuals will no longer benefit from the protected settlement regime from 6 April 2025 – this is covered in more detail below.
Non-doms who have become deemed domiciled in the UK before 6 April 2025
These individuals will already be taxed on their worldwide income and gains under the arising basis, so this will not change.
These individuals will no longer benefit from the protected settlement regime from 6 April 2025 – this is covered in more detail below.
Historic unremitted income and gains
From 6 April 2025 until 5 April 2027, individuals who have previously been taxed on the remittance basis under the current non-dom regime will be able to bring unremitted pre-6 April 2025 foreign income and gains to the UK at a special reduced rate of 12% under a new Temporary Repatriation Facility (the TRF).
The government have stated that this will only apply to foreign income and gains which arose to the individual personally (and not to foreign income or gains generated within trust structures) – it is not yet clear what this means in the context of trust income or gains that are treated as arising or accruing to a UK resident non-dom prior to 6 April 2025 (eg as a result of receiving a distribution or other benefit from the trust) but which was not subject to UK tax because the remittance basis applied. Given that the purpose of the TRF is to encourage former remittance basis users to bring unremitted funds into the UK, it would seem odd to exclude income and gains just because they derived from a trust structure.
The government have also announced that the mixed fund ordering rules will be partially relaxed to make it easier to take advantage of the TRF.
Trust Protections
The protected settlement regime, under which foreign income and gains arising within settlor-interested offshore trust structures are not taxed on UK resident non-dom settlors (or on deemed domiciled settlors, provided that the trust has not been “tainted”) unless and to the extent that they receive a benefit from the structure, will no longer apply from 6 April 2025.
From that date, foreign income and gains from such settlements will therefore be taxed on UK resident settlors as they arise (but pre-6 April 2025 foreign income and gains will continue to be matched to benefits under the existing regime), unless the settlor is a new or recent arriver within the new four year regime.
Settlors and beneficiaries who are new or recent arrivers within the new four year regime will also be able to receive benefits from offshore trust structures from 6 April 2025 completely free of UK tax (whether or not the benefits are received in or brought to the UK). However, the value of those benefits will not reduce the pools of relevant income or stockpiled gains available for matching to benefits received by arising basis UK taxpayers and will also be subject to a modified onward gifts rule.
Inheritance Tax
IHT is a currently a domicile-based regime. The worldwide assets of UK domiciled (or deemed domiciled) individuals are within the scope of IHT but for non-doms this is limited to assets which are situated in the UK only. In broad terms, non-UK assets held in a trust made by a non-dom are also outside the scope of IHT.
The intention is that domicile should be replaced by residence as the connecting factor for IHT. However, the government’s plans are not as fully formed as for income tax and capital gains tax and so the IHT rules will be subject to consultation.
It is envisaged that an individual’s worldwide assets will fall within the scope of IHT if the individual has been resident in the UK for 10 or more years (and that worldwide assets will remain within the scope of UK IHT for 10 years after such an individual has left the UK).
For trusts, the intention is that chargeability of non-UK assets will depend on the settlor’s position when assets are settled and/or when IHT charges arise (such as 10 yearly or exit charges for discretionary trust); if the settlor has been resident in the UK for 10 or more years at the relevant point in time (or is caught by the 10 year “tail” after leaving the UK after a period of residence of 10 years or more), then the trust’s worldwide assets will be within the scope of IHT.
The government has attempted to give some certainty by stating that the current IHT rules will apply to trusts created or added to by non-doms prior to 6 April 2025; whilst this statement is helpful, it cannot yet be relied on given the two points we make at the start of this note.
A footnote on domicile
The concept of domicile itself is not being abolished – the proposed changes simply mean that it will no longer be a relevant factor for UK tax purposes.
Domicile remains a connecting factor in many other contexts, such as succession and family law.
