Non-Dom reforms – the opportunities and risks for US clients  

The UK Government’s 2024 Spring Budget announced major changes to the UK taxation of non-UK domiciled (Non-Dom) individuals due to take effect from 6 April 2025. The UK General Election, which will take place on 4 July, may result in a change of government but the Labour party has indicated that it will support, and in some areas, extend the current Government’s proposals. For an overview, see our recent articles  Non-Doms and the Spring Budget 2024 and Taxation of non-doms under a Labour government.  

The proposed changes will have major implications for many Non-Dom clients, but there may also be benefits and opportunities for US clients which are not available to other Non-Doms.  In this article, we explore the key opportunities and also some risks that these reforms may create for US clients.  

Opportunities 

Tax on income and gains 

Abolition of the Remittance Basis 

Currently Non-Doms may elect to be taxed on the remittance basis for up to 15 years of UK residence. This limits UK tax on foreign income and gains (FIGs) – only FIGs which are remitted to the UK are subject to UK tax. From April 2025, the remittance basis will be abolished, and the current proposal is that this will be replaced with a new four-year FIG regime. Under this regime, individuals who have not been UK resident for 10 years will not be subject to UK tax for their first four years of UK residence, and, thereafter, will be subject to UK tax on an arising basis. This reduction in the FIG protection period from 15 years to four years has major implications for many clients.   

For US citizen clients the impact may, however, be less severe. The remittance basis has historically been problematic for US citizens living in the UK, since it risks exposing them to double taxation due to a potential mismatch of their tax liabilities in the UK and the US. US citizens are subject to US tax on their worldwide income and gains. If they also pay UK tax on the same income and gains at the same time, then they can claim a foreign tax credit against any US tax liability. By contrast, US citizens claiming the remittance basis pay full US tax on their income and gains, and, provided that they do not remit their income and gains, suffer no corresponding UK tax to offset against it. If FIGs are later remitted to the UK a tax liability arises, but it is then typically too late to claim the foreign tax credit in the US. For this reason, many of our US clients do not claim the remittance basis. 

The new four-year FIG regime is likely to be far preferable to US clients – they would benefit from (lower) US tax rates during the first four years of UK residence without the risk of any UK tax later arising on the same FIGs. After the four-year period, UK and US tax should arise on the FIGS at the same time and so a tax credit should be available. 

Temporary Repatriation Facility and Rebasing 

Existing US citizen Non-Doms who have, perhaps mistakenly, claimed the remittance basis may wish to take advantage of the “Temporary Repatriation Facility” to remit their pre 6 April 2025 FIGs in the 2025/2026 and 2026/2027 tax years at a 12% rate of tax (compared to the current rates on remittances of up to 45%). 

These existing remittance basis taxpayers may also elect on disposal to rebase their offshore assets at their April 2019 value for the purposes of UK tax. However, rebasing only applies to personally held assets. US clients should be cautious that assets held, for example, in a trust or in an LLC may not qualify. 

Abolition of the protected settlement regime 

The current ‘protected settlements’ regime will likely be abolished, causing UK resident settlors of offshore trusts to face immediate UK tax on trust FIGs. However, this change may not impact US clients as much as others. Well-advised US citizens have often chosen not to apply protected settlement treatment (by ‘tainting’ such trusts) because they lead to a risk of double taxation. Where US tax arises immediately on trust FIGs it is often preferable to ensure that UK tax arises at the same time and on the same taxpayer to allow a foreign tax credit. The protected settlements regime, however, usually delays UK tax and transfers the tax liability to UK beneficiaries, causing both a timing mismatch and a taxpayer mismatch and thus excluding any foreign tax credits. 

Inheritance tax 

Individuals   

The new inheritance tax (IHT) regime is subject to consultation, but the proposal of the current government is to abolish the existing domicile regime and replace this with a 10-year residency test, including a 10-year tail during which taxpayers will continue to be within scope of IHT on their worldwide estate after leaving the UK. 

The US/UK Estate Tax Treaty (the Estate Tax Treaty) may, however, provides key protections for US clients to mitigate the impact of this new regime.  Individuals leaving the UK who are not British nationals may be able to establish their “treaty domicile” in the US. This should limit their IHT exposure to UK real estate and business assets only and the potentially onerous 10-year tail provisions should not apply. 

Non-Doms who have been a UK resident over 10 years and who will immediately fall into the scope of IHT in April 2025 may wish to make gifts of non-UK assets before that time whilst they are exempt from IHT. US citizens will need to consider US gift tax, but as mentioned above the US federal estate and gift tax lifetime allowance is due to reduce by almost half at the start of 2026 unless new laws are enacted in the US. This provides another incentive to consider giving now! 

Trusts  

Currently trusts established by Non-Doms may permanently shield assets from IHT even after the settlor becomes UK domiciled. It is proposed that, from April 2025, once the settlor is personally within the scope of IHT any trust created by him or her will also be in scope for IHT. The Government proposes a ‘grandfathering’ relief i.e. the new rules will not apply to existing trusts created before April 2025, but the Labour Party plans to extend the new regime to catch all trusts, whenever created. 

Despite the proposed changes to the IHT treatment of trusts, the Estate Tax Treaty may again assist to protect many US trusts from exposure to IHT. This protection can be available where US nationals (who are not also UK nationals) create trusts whilst treaty-domiciled in the US.  This may give US clients a privileged position compared to nationals of most other countries who may suddenly find their trusts exposed to IHT. 

Risks  

Individuals  

For clients living between US and UK, it is essential to carefully plan their ‘treaty residence’ i.e. the country in which they are considered to be resident for the purposes of the UK/US Income Tax Treaty (the Income Tax Treaty). This will determine the country with primary taxing rights over their income and gains. It is quite possible to be UK resident under local rules, but limit exposure to UK tax by maintaining treaty residence in the US. 

However, the interaction of the new FIG rules with the Income Tax Treaty requires careful consideration. It is likely that a person cannot be considered ‘treaty resident’ in the UK during the first four-year FIG exemption period, since the treaty confirms that the term “[resident in a State] does not include any person who is liable to tax in that State in respect only of income from sources in that State”.  This may cause a client’s US tax position to change unexpectedly if they are no longer treated for US purposes as being treaty-resident in the UK.  

Trusts  

The proposed changes to the IHT treatment of trusts are likely to be significant for US/UK nationals who do not benefit from the Estate Tax Treaty advantages described above. The categorisation of US trusts in the UK is often uncertain.  Many US revocable grantor trusts may in fact not be settlements at all for IHT purposes, and so will not therefore benefit from grandfathering relief even if created before April 2025. Grantors and next-generation beneficiaries of existing US trusts should seek specialist UK advice to confirm their tax treatment in the UK ahead of the 2025 changes. If grandfathering rules are included in the new IHT regime for trusts, it may be important to convert existing trusts into IHT settlements before the relevant date. 

Many US advisors are encouraging their clients to create irrevocable trusts to make use of the current US estate tax allowance, which is currently at $13,610,000, but is expected to reduce to about half of this level from 1 January 2026. These trusts may have significant ramifications in the UK and so will need to be carefully reviewed and considered.  

How can we help 

Our US/UK Private Client Team specialises in providing UK tax advice to US connected clients.  The opportunities and risks for US connected clients posed by the proposed new rules on the taxation of non-UK domiciled individuals will depend on their individual circumstances, so please get in touch if you would like to discuss.