The UK government's Spring Budget 2024 has unveiled significant reforms to the taxation of non-domiciled residents (non-doms), set to take effect from April 2025. These changes aim to modernise the tax system by shifting from a subjective domicile-based test to an objective residence-based regime. This is the biggest shakeup to the existing rules since 2017, and significantly change a regime that has famously been in existence in one form or another for over 200 years. These changes will require a proactive strategy to avoid steep tax obligations.
Here, Haines Watts Tax Advisor Nicola Goldsmith explains what these changes mean for non-domiciled UK residents, how they could change under future governments and how to start preparing your assets.
What are the key changes from the Spring Budget 2024
From April 2025, the concept of 'non-dom' status will be radically altered:
- End of the remittance basis: Currently, non-doms can opt to pay UK tax only on foreign income and gains that they bring into the UK (remittance basis), although after seven years they pay a charge for this basis. The new rules will abolish this option, aligning non-doms resident in the UK with other UK residents who pay tax on worldwide income and gains as they arise.
- New four-year exemption for new arrivals: Those who have not been UK residents for the ten years prior to their arrival will be entirely exempt from UK tax on foreign income and gains during their first four years of residency. This will be pro-rated depending on when people become resident prior to the introduction of the rules.
- Transitional relief measures: Existing non-doms who do not qualify for the new rules will benefit from transitional reliefs. They will enjoy a 50% reduction in foreign income (but not foreign gains) subject to UK tax in the tax year 2025-26. Additionally, a re-basing of capital assets to April 2019 values for tax purposes is allowed, which can reduce potential capital gains tax liabilities on future disposals. Finally, they will be able to bring in any unremitted income and gains arising prior to April 2025 at a flat tax rate of 12% for the 2025-26 and 2026-27 tax years.
- Inheritance tax: the is to be consulted upon, although any excluded property trusts created prior to 6 April 2025 will retain that excluded status. These trusts are trusts created by non-UK domiciles and contain non-UK assets and are not subject to UK inheritance tax.
The Labour Party has indicated that if they come into power, they intend to accept the changes proposed by the Budget, but will further restrict the benefits available under the new rules. Key proposals include:
- Reducing transitional reliefs: Labour have said that they will eliminate the transitional reliefs for those not qualifying for the new regime.
- Inheritance tax: Labour will introduce IHT on worldwide assets for those who have been UK resident for 10 years, and even if they leave after this period, their worldwide assets will remain liable to UK inheritance tax for the following 10 years.
- Changes to trusts: Labour also plans to tighten the rules on trusts, potentially subjecting non-UK assets within trusts settled by non-UK domiciles to UK inheritance tax, regardless of when the trust was established (so could potentially bring some trust assets into UK inheritance tax retrospectively).
What does this mean for Non-Doms?
These changes are aimed at a shift towards greater tax equality and simplicity but come with increased tax liabilities for non-doms. Those who have relied on the remittance basis will need to reconsider their tax planning strategies.
- Loss of Remittance Basis: Tax advantages that once extended up to 15 years are curtailed for those in the UK for over 10 years, requiring rapid planning to mitigate.
- Increased tax liability: Foreign income and gains are now subject to UK taxation, which will significantly impact non-doms accustomed to preferential treatment.
- "Stay or leave": Some individuals may choose to leave the UK to avoid the new tax regime. Others will need to proactively restructure their financial affairs to minimise their tax burden within the new system, taking into account their long-term plans regarding UK residency.
How to plan for the new non-domicile regime
While the landscape for non-doms has shifted, there remain viable strategies to mitigate the impact of recent tax changes. Key options to explore include:
- Remittance planning and preparation: For those caught outside the new rules, it is worth considering what clean capital is available, and keeping unremitted income and gains offshore, separated into the different funds. This will still be taxable if ever remitted into the UK. If the (so some kind of) transitional rules do come into play, it may be tax-efficient to take advantage of these to remit previously unremitted income and gains.
- Tax-Efficient Investment Vehicles: One of the simplest ways to keep income out of the scope of the new rules is simply to not have income unless this is actually needed. Offshore bonds offer potential for income and gains to roll-up with tax-free, although these are of limited benefit if more income is required than can be provided tax-free, or for those looking to stay in the UK beyond 20 years. However, for those considering staying in the UK for less than 20 years, they can offer a tax-efficient option to minimise the income and gains exposed to UK taxation.
- Inheritance tax (IHT) mitigation: Proactive IHT planning is crucial for those anticipating a long-term stay in the UK. IHT-efficient investments should be considered carefully, along with structures that can protect and payout a portion of asset growth to future generations. For those caught by the 10 year ‘tail’ (if introduced by Labour), inheritance tax insurance may be a sensible option and is worth looking into, particularly if there is a ‘taper in the tail’ i.e. the amount caught by UK inheritance tax reduces the longer you remain outside the UK. It is always worth remembering UK assets always remain subject to UK inheritance tax, so that will not change, and you need to think what you want to do about these.
- Business investments: Reliefs on business investment offer several routes for tax-efficient investment, including Business Property Relief (BPR) to potentially reduce IHT liabilities or AIM shares. EIS and VCT investments can be used to mitigate income tax and CGT, and are often in businesses that may attract BPR, so a triple tax savings advantage, although, of course, these may be more risky investments in the first place.
- Trust structures: Trusts remain a valuable tool for asset protection, but their tax benefits (or otherwise!) and cost must be considered carefully.
- Family investment companies (FICs): Using FICs with multiple share classes to manage IHT exposure, potentially shielding growth from taxation by directing it to designated beneficiaries. Dividends may also be paid to different shareholders at different times, although there are anti-avoidance rules that may apply.
- Business investment relief (BIR): BIR provides an avenue to invest in qualifying UK businesses, including property businesses, allowing investors to bring in relevant funds without immediate UK tax implications under the current remittance basis. It will be interesting to see if this is retained going forward, allowing unremitted income and gains arising before April 2025 to be brought into the UK tax free for investing in businesses.
The right options will depend on individuals’ own goals and the duration they intend to spend in the UK. For those simply looking to minimise their tax exposure, leaving the country is the simplest option, but life is rarely so simple.
The key is to work with an advisor who can help you adapt your strategy to this fast-changing area.
How to optimise your tax planning with Haines Watts
For non-domiciled residents in the UK, these changes require action, especially for those on the borderline of falling into new obligations. Whilst we do not know when the next election will be, or exactly what the new rules will be if there is a change of government, some planning can still be considered sooner rather than later. The reality today is that the longer you wait to plan, the fewer the options for mitigating your tax burden that are likely to be available to you.
