Written by Adam Craggs, partner and head of RPC’s Tax Disputes and Investigations team
The UK government’s announcement at the Spring Budget in relation to changes to the taxation of non-domicile individuals, represents a major change to the current age-old system.
The proposed changes mean that the concept of domicile will be removed from UK tax legislation and replaced with various residence-based tests. Further, the remittance basis of taxation will be abolished and replaced with a 4-year period for new UK residents in which their foreign income and gains will be exempt from tax.
Leaving aside the broader economic impact of the changes for the UK economy, we consider below how the proposed changes are likely to impact non-domicile individuals personally.
Winners and losers of the new non-UK domicile tax regime
Whilst the residence-based tests are expected to offer greater clarity and certainty by potentially requiring less careful management than under the current remittance regime, the changes will not be advantageous for all non-domicile individuals. The impact of the changes will depend on the individual circumstances of the individual concerned and some of the new features may lead to some non-domicile individuals leaving the UK.
The 4-year regime
For individuals that become tax resident in the UK after 10 years of non-UK tax residence, a new 4-year foreign income and gains regime will apply, under which they will benefit from not having to pay tax on foreign income and gains arising in the first 4 years after becoming UK tax resident. It will be possible to bring these funds to the UK free from any additional charges.
Non-domicile individuals may look at these changes with some initial optimism. However, on closer inspection, the proposed changes do present a number of challenges. The 4-year period is considerably shorter than the 10-year period offered in some other countries, within short flying distance of the UK, such as Switzerland, Italy, and Greece. Also, the rules mean that even if an individual is UK resident for only one of the tax years in the 10-year period, they will be prevented from accessing the regime and there is no ability for an individual to carry forward any unused allowances for any years that they are UK resident.
Trust structures
The impact of the changes on the current settlements regime may be considered the biggest disappointment by many non-domicile individuals as, from 6 April 2025, all current non-domiciled and deemed domiciled individuals who do not qualify for the new 4-year regime will no longer benefit from protection from taxation on future income and gains that arise within trust structures.
The loss of trust protection may also encourage non-domicile individuals to relocate to more fiscally favourable jurisdictions. However, for those who are not so encouraged, they may wish to consider realising any gains before the April 2025 changes take effect, or consider being excluded as beneficiaries in order to reduce their tax exposure in relation to any trust income. As part of any such process, careful thought should be given to any ongoing capital gains tax exposure. It might be that some non-domicile individuals consider terminating their current trust arrangements, but this may not be straightforward where the trust structured has a non-tax purpose.
Transitional reliefs
The proposed transitional reliefs may provide some comfort to non-domicile individuals, as they are relatively generous. From 6 April 2025, individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittance of pre-6 April 2025 foreign
income and gains, under a new Temporary Repatriation Facility that will be available for tax years 2025/26 and 2026/27. Further, individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new 4-year regime will, for the 2025/26 tax year only, pay tax on 50% of their foreign income (not foreign chargeable gains).
The 12% rate represents a considerable saving compared to the rates that would otherwise apply to the remittance of foreign income (up to 45%) and foreign chargeable gains (up to 28%). Current or former remittance basis users may therefore wish to wait to make a remittance of foreign income or gains until after April 2025, to benefit from the 12% rate.
Inheritance tax (IHT)
The government also intends to move inheritance tax from a domicile-based regime to a residence-based regime, with effect from 6 April 2025, both for personally held assets and assets held in trust. As the detail of the changes are currently unclear, it will be important to carefully consider the position once the proposed legislation has been enacted.
Planning ahead
Non-domicile individuals should prepare for the above proposed changes to the taxation of non-domicile individuals in the UK. It might be prudent for non-domicile individuals to delay any major planning until the intended changes become clearer (on publication of the proposed legislation) and the outcome of the next general election is known. That said, non-domicile individuals and their professional advisors, should start to consider the impact the proposed rule changes are likely to have. Consideration will no doubt be given to whether affected individuals should organise their affairs so as to fully utilise the new regime, or simply relocate to alternative more fiscally attractive jurisdictions.
