How UK tax reforms to end ‘non-dom’ status could affect you
After months of speculation, the UK Government announced in its Autumn Budget that it intends to abolish non-domiciled status and replace it with a residence-based tax regime. Here, Andrew Robins, Partner at leading tax advisory RSM UK, answers key questions about what could change.
The UK Government’s draft legislation on changes to the taxation of non-domiciled UK residents is 103 pages long. Most of the changes to the regime had been expected.
There are many nuances within the proposals, so it is important that you take your own tax advice tailored to your specific personal circumstances. However, here are some highlights to be aware of.
What will happen to the remittance basis of taxation?
From 6 April 2025, the remittance basis of taxation will be abolished. This means that all UK-resident individuals will be taxable on their worldwide income and gains in the year they arise. The only exception will be for new arrivals to the UK.
Transitional rules will apply to foreign income and gains (FIG) from 6 April 2025 to 5 April 2028. During this period, it will be possible to opt into a Temporary Repatriation Facility (TRF). Taxpayers can choose to designate some or all of their foreign income and gains, which will be taxed at 12% if designated by 5 April 2027 and 15% if designated between 6 April 2027 and 5 April 2028. The designated funds can be brought to the UK at any time without incurring further tax deductions.
Non-cash assets can also be included. Undesignated FIG will continue to be taxed on remittance under current rules.
Alex used £1m of untaxed foreign income to buy a house in Spain. He expects to be in the UK long term and would like access to these funds when the house is eventually sold. By designating the £1m of income, Alex is taxed immediately at 12% but can then bring the proceeds to the UK at any time in the future with no additional remittance charge.
You should consider the opportunity if you need to use the funds in the UK: if not, you can simply leave your undesignated funds offshore.
How will the tax changes affect new arrivals to the UK?
New arrivals to the UK will be eligible for the new tax system covering foreign income and gains. When you claim, foreign income and gains arising in the first four years of UK tax residence will qualify for 100% tax relief. No UK tax will be payable on these funds, even if they are used in the UK at a later date.
To qualify, individuals will need to have been non-UK resident for the ten years prior to arrival in the UK. Not all income and gains qualify so professional advice is recommended.
What Capital Gains Tax changes are there for non-doms?
Limited relief will be available for foreign assets held on 5 April 2017 and sold after 5 April 2025. There are numerous conditions to be met, the most significant of which is that the owner must have been non-domiciled on 5 April 2025.
For Capital Gains Tax (CGT) purposes, qualifying assets will be rebased to their market value on 5 April 2017.
How have Inheritance Tax rules been impacted by the new legislation?
The abolition of non-dom status means that all long-term UK residents will be subject to Inheritance Tax (IHT) on their worldwide assets. For IHT purposes, an individual will be long-term resident in the UK if they have been resident for at least ten out of the last 20 tax years immediately preceding the year of charge.
Sanjay moved to the UK in 2000/01. If Sanjay leaves the UK on 5 April 2025, he will have been UK resident for the previous 20 tax years and will lose his long-term resident status after 10 years of absence, on 6 April 2035.
What if I am leaving the UK?
Once an individual has been a non-resident in the UK for ten consecutive years, they will cease to be taxable on non-UK assets.
Anyone who has been resident for 20 years or more will remain subject to IHT on worldwide assets for ten years following their departure from the UK. The residence period takes account of time spent in the UK in the last 20 years, including before 2025/26.
If an individual ceases to be UK resident after having been resident for between ten and 20 years, they will remain subject to worldwide IHT for a shorter period.
The definitions of long-term residence are different for IHT and other taxes and this means individuals should seek specialist advice if considering leaving the UK.
The new rules will not apply to non-deemed domiciled individuals who are non-UK resident in 2025/26 even if they have been UK resident for more than ten years. These individuals are currently not subject to IHT on foreign assets and will retain this protection unless they resume UK residence in the future.
Are changes planned for trusts?
Changes have been announced affecting trusts with a non-dom settlor covering income tax CGT and IHT. These are the main ways you could be impacted:
What happens with income tax and CGT for trusts?
The tax position of offshore trusts without a living settlor (the person who puts assets into a trust) is not affected by any of the changes announced. That is also the case for trusts where the settlor is alive but is both non-UK domiciled and non-resident. However, the position of trusts with a UK resident settlor will change significantly from 6 April 2025.
From that date, unless the settlor qualifies for the new FIG regime, all income arising to the trust will be taxed on the settlor, unless they and their spouse are excluded from any benefit. Capital gains of the trust will also be taxed on the settlor if they can benefit, and for CGT purposes the definition of benefit is very wide and can still apply even where the settlor and spouse have been excluded.
Income and gains arising to the trust before 6 April 2025 will continue to be taxed by matching to distributions or other benefits provided to UK resident beneficiaries, with some exceptions.
What happens with IHT for trusts?
Before the Autumn Budget, there was considerable concern that foreign assets of excluded property trusts would be brought within the scope of IHT from 6 April 2025. In many cases this will not happen.
Non-UK assets held by trusts with a non-UK settlor prior to 30 October 2024 will not be included in the estate of the settlor on death.
However, trusts with a long-term resident settlor will incur periodic IHT charges. These are applied every 10th anniversary at a rate of up to 6%, and on capital distributions at a lower rate.
If the settlor has been UK resident for 20 years on 6 April 2025, all assets of the trust will be subject to periodic IHT charges. If the settlor subsequently leaves the UK, after 10 years of non-UK residence, the foreign assets of the trust revert to be excluded from these periodic charges. However, at this point there will be a one-off IHT exit charge of up to 6%. If the settlor dies as a long-term UK resident, all assets of the trust remain within the scope of periodic IHT charges permanently.
Currently, most investments in qualifying UK businesses and agriculture are fully relieved from IHT. From 6 April 2025, this relief will be capped at £1m and above that level relief will be restricted to 50%. This means that UK business assets of many offshore trusts will be brought within the scope of IHT periodic and exit charges for the first time.
For those remaining in the UK, thought should be given to taking advantage of the TRF. This will include consideration of what funds you would like to be able to use in the UK in the future, and which to designate to be taxed.
CGT rebasing will not be relevant to many but needs to be looked at if you are not yet deemed domiciled.
Some investments that were previously sheltered from UK tax will now become subject to tax and will need to be restructured.
Restructuring of how trust investments are held is likely to be relevant in many cases.
Settlors will need to know whether trusts qualify for the income and CGT motive defences. The TRF will be available on certain distributions received by settlors in the past and on certain distributions made during the TRF period to all beneficiaries. This provides an opportunity for income and gains of the trust to be taxed at the reduced TRF rate of 12%.
Trustees will need to take account of the date trusts were created, to consider when IHT returns begin to be required and periodic tax charges become payable. Trustees will also need to know when settlors leave the UK and cease to be long-term residents, since this will generate exit charges payable by the trust.
Great care will be required where trustees are planning to acquire UK assets, including making loans to UK resident beneficiaries. Advice should also be taken before any UK asset acquisition, since it could result in the permanent loss of IHT protection. Where UK business assets are held, trustees will need to decide whether to retain these and incur IHT or to sell up, potentially creating a tax charge for any UK resident settlor.
Is it time for non-doms to change status?
We believe that non-doms who had been thinking about leaving the UK before this new legislation will probably choose to stick to their plan. For non-doms considering staying in the UK, the new rules provide much food for thought. Now is the time to talk things through with your adviser.
Reminder: The main changes proposed to the non-dom tax regime
| Tax | Expected changes |
|---|---|
| Remittance basis of taxation |
|
| Foreign income and gains (FIG) & UK income tax |
|
| Capital Gains Tax |
|
| Inheritance Tax |
|
| Other non-dom areas | |
| New arrivals to the UK | New and simpler tax system |
| Statutory Residence Test | Unchanged |
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