Non-Doms and the Spring Budget 2024

The Chancellor announced today that the tax rules for “non-doms” will be changed, and a new regime introduced. What’s changing, what does this mean for our non-domiciled clients and what should they be doing now?

Income Tax and Capital Gains Tax (CGT)

Individuals and the Remittance Basis

From 6 April 2025 the remittance basis will be replaced with a four-year “Foreign Income and Gains” (or FIG) residence-based regime. During the first four years, new tax-residents will not be subject to UK tax on their overseas income and gains and will be able to remit that income/gains to the UK without suffering a UK tax charge. The Government expects this measure to generate additional tax revenue of between £2.8bn and £3.6bn per year from April 2026 onwards. However, for the initial four years of residence, the replacement regime would be more favourable than the existing remittance basis rules.

Unpicking the existing remittance basis regime will be no easy task, and the following transitional policies have been announced alongside the headline change:

• There will be a “Temporary Repatriation Facility” which will allow existing remittance basis payers to remit overseas income and gains to the UK in the 2025/2026 and 2026/2027 tax years at a 12% rate of tax (compared to the current rates on remittance of up to 45%). Remittances after 6 April 2027 will be taxed in the same way as they are currently.

• After the initial four-year period, overseas capital gains will be subject to UK Capital Gains Tax in the usual way. However, existing remittance basis users will be able to rebase their overseas assets to their 5 April 2019 value, which will remove some historic gains from the scope of UK tax.

• For existing remittance basis users who do not qualify for the FIG regime (i.e. if they have been UK resident for four years already on 6 April 2025), only 50% of their overseas income will be subject to UK tax in the 2025/2026 tax year.

Trusts

The existing tax rules provided a special regime (known as the Protected Trusts regime) for non-resident trusts whose settlors have retained an interest in the trust and who become resident in the UK. Provided certain conditions are met, the Protected Trusts regime prevents the trust’s income and capital gains from being chargeable on the settlor on an arising basis.

This favourable regime will not apply to any income that arises from 6 April 2025, with the new rules covering both trusts set up after that date, and those already in existence. 

What this means in practice is that a settlor of a non-resident trust could have a significant UK tax liability on that trust’s assets if they remain resident from 6 April 2025. There will be transitional rules to deal with income and gains that arose before that date, which will further complicate the administration of such trusts. These changes will reduce the UK tax efficiency of non-resident trusts and may make the establishment of trusts after April 2025 less attractive.  However, as explained below, the IHT benefits of existing trusts set up by non-domiciliaries will remain.

Inheritance Tax (IHT)

Individuals

Under the current rules, a non-domiciliary is not subject to IHT on their non-UK assets unless they become “deemed domiciled” in the UK (which occurs after 15 years of UK residence in any 20-year period). From 6 April 2025, UK IHT will apply to an individual’s worldwide assets after 10 years of residence. 

In practice, clients will therefore become exposed to worldwide IHT exposure much sooner following the rule changes. No transitional provisions have been announced yet to cover those clients who are currently not deemed-domiciled but who will become subject to the new rules in April 2025, although the Government will conduct a consultation before introducing the rules to consider how this can best be managed.

Trusts

A complex IHT regime currently applies to assets held in trusts created by UK domiciled settlors. This includes tax charges when assets enter and exit trusts, periodic charges every 10 years, and in some cases, IHT charges on the death of a beneficiary.

The treatment of non-UK assets that are settled by a non-UK domiciled settlor (i.e. Excluded Property Trusts) prior to 6 April 2025 will not change – these trusts will continue to be outside the scope of IHT. 

However, for assets settled in trust from 6 April 2025 the new residence-based rules will apply.  It appears that, whether the trust assets are chargeable to IHT will depend upon whether the settlor meets the new 10-year residence rule described above. This is likely to create a rush to settle assets in trust and lock-in Excluded Property treatment before 6 April 2025.

The Government has confirmed that the existing Gift with Reservation of Benefit (or GROB) rules will remain in place for trusts set up before 6 April 2025. Consequently, pre-existing settlor interested trusts will remain outside of the UK IHT net even if the settlor themself has become liable to worldwide IHT.

Planning opportunities

What does today’s announcement mean to clients who are currently resident but not domiciled in the UK? Whilst the detail of these proposals is not yet clear, we would suggest that such clients consider the following:

• For clients who are currently considering remitting funds, or making disposals overseas, there may be a benefit in delaying any transactions or remittances until April 2025.

• Would now be a good time to set up a new Excluded Property Trust? Trusts established before April 2025 will retain their favourable UK IHT treatment. After April 2025, the ability to reduce exposure to UK IHT may be greatly restricted. Those concerned about their UK IHT exposure should consider setting up trusts in the next 12 months so that their structures are grandfathered under the existing rules.

• The new Income Tax and CGT may mean that certain types of investments become more attractive to clients who are temporarily UK resident, such as investment funds that allow for the roll up of income.

• Depending on where the client’s non-UK assets are located, relief from UK tax may be available under the extensive library of existing double tax treaties.

• For those who are relocating to the UK, existing trust structures of which they are settlors should be reviewed. The impact of the removal of the Protected Trusts regime could be significant and any planning must be carried out before the settlor becomes UK resident.

• Clients who are likely to become subject to worldwide taxation from April 2025 should consider whether it would be appropriate to accelerate disposals of overseas assets so that they can be remitted in the 2025/2026 and 2026/2027 tax years at the lower 12% rate of tax.

Remaining uncertainties

Two big uncertainties remain. First, domicile is not a concept used solely in tax legislation. It also has a bearing on UK succession laws (i.e. who will inherit your estate on death), in certain types of family law proceedings and, no doubt, in other areas of law as well. If enacted, the announcements today would result in a significant change to the current tax landscape, but it is likely that as a concept domicile, with all its vagaries, will remain relevant even after April 2025.

Perhaps more importantly, the implementation date for these changes is after the next General Election. If, as the polls predict, a change of government takes place, there is no guarantee that the Labour party would enact these policies without further amendment.

We recommend that anybody concerned by today’s announcements contacts our International Private Client Advisory Team who are on hand to help.