Non-Dom Changes – FAQs

In his Budget of 6 March 2024, Chancellor Jeremy Hunt announced significant changes to the non-dom regime – effectively abolishing the need to reference domicile in tax law by replacing it with a residence based test for those who have not been UK tax resident in the last ten years (the concept of domicile still remains relevant to the drafting of Wills and the devolution of assets on death).

Much of the detail is not yet known, but affected taxpayers will have a number of questions and we seek to outline what we know so far in the FAQ sheet below. This sheet assumes the rules come into effect on 6 April 2025 as planned, and in the form announced. There is of course uncertainty on this point because the proposals are often changed during the consultation process, but also because of the upcoming general election in 2024 which could lead to a change in government.

Q1 – I Am Thinking Of Moving To The UK In The Near Future – Will These Rules Affect Me?

Yes – if you move to the UK on or after 6 April 2025, the current rules will not apply and it is only the new rules that will affect you.

This means that, for the first four tax years from the time you start to be UK tax resident, you can elect only to be taxed in the UK on UK income. The election is a year-by-year election and if made means all foreign income and gains (FIGs) arising in that year will never be taxed in the UK even if brought to the UK. Traditional bank account segregation would not be required, making banking arrangements simpler.

If you move to the UK in 2024/25 you will have one year under the current rules, and will have three years of the FIG rules before you are then taxed in the UK on worldwide income and gains under the arising basis. See also Q6.

The proposed rules also mean that pre-arrival planning around disposing of assets to rebase their value is less relevant since in the first four years it is possible to dispose of non-UK assets and bring the proceeds to the UK free of tax.

Q2 – I Live In The UK And File On The Remittance Basis – What Will The Changes Mean For Me?

If at 6 April 2025 your first year in the UK was less than four years previously, you will be able to benefit from the FIG regime until four tax years have elapsed from arrival in the UK.

For those who are currently in the UK and will move to compulsory worldwide taxation in 2025/26, there will be a transitional year, where UK tax is only levied on 50% of your foreign income for that year. After that, you will be obliged to file on the arising (worldwide) basis if you are tax resident in the UK. From this point on, it will be important to make sure any tax credits are claimed to provide you with the best overall tax position. You could also review your tax and investment strategy to see if this can be updated.

The transitional year does not affect capital gains, but instead there is a possible rebasing of non-UK assets to their value in April 2019 if they were held at that point, you have claimed the remittance basis and are not domiciled or deemed domiciled in the UK on 5 April 2025.

Q3 – I Am Living In The UK And Already Deemed Domiciled – How Do The Rules Impact Me?

As a deemed domiciled individual living in the UK, you will already be reporting worldwide income and gains in the UK so the reporting of your personal FIGs will not change.

If you are the settlor of a non-UK trust, from 6 April 2025 you will also be taxed in the UK on the trust’s FIGs. Excluding yourself from benefit would not be enough to prevent foreign income being taxed on you; you would need to exclude yourself, your spouse and any minor children for this strategy to work for income tax purposes, and for capital gains tax purposes the class of beneficiaries to exclude to prevent gains being taxed on you would be so wide it may not be desirable.

If you have prior year overseas income and gains you wish to bring to the UK, you may be able to benefit from the Transitional Repatriation Facility (see Q6 below) which, if available to deemed dom individuals, would allow you to bring those funds to the UK at the reduced tax rate of 12%.

Q4 – I Have Recently Left The UK / Am Leaving Before 5 April 2025 – Do I Need To Be Aware Of Anything?

Taxation of non-UK residents is not set to change with the new rules.

Once you are no longer tax resident, the UK only seeks to charge UK tax on certain types of UK income. This includes UK rental profits and some pension income. UK dividends and interest can also impact the UK tax computation.

UK capital gains tax is charged on non-UK tax residents when they dispose of UK residential or commercial property at a gain. For residential property held before April 2015 or non-residential property held before April 2019, it is possible to rebase the value to those dates. Indirectly held UK real estate can also be chargeable to UK capital gains tax with a value rebased to April 2019.

With a shift to residence based tests, the proposal is that individual who have been UK tax resident for ten years will be within the scope of UK inheritance tax (IHT) on worldwide assets for a further ten years after they leave. This is a long tail to plan for, and there is currently no information on what will happen to individuals who have been in the UK under 15 years so are not yet deemed domiciled, but would be caught by the new IHT rules. Consultation will follow and we will gain more clarity in due course.

Q5 – Will Overseas Workday Relief Still Be Available?

Yes – the Chancellor confirmed that for the first three years of UK tax residence, employees will be able to claim overseas workday relief and earnings attributable to non-UK workdays will not be taxed in the UK. With the new FIG rules, we presume that there will no longer be the need to maintain a specific overseas bank account into which the payments are made as is currently required.

Sadly there is no mention that overseas workday relief will be extended to self employed individuals and so we presume that sole traders based in the UK will continue to be taxed in the UK on worldwide profits unless further provision in made.

Q6 – What About Overseas Income And Gains From Years When I Claimed The Remittance Basis?

Historic non-UK income and gains in remittance basis years will not be taxed in the UK if retained overseas. There is to be a two year window – called the “Temporary Repatriation Facility” (TRF) in 2025/26 and 2026/27 when those who have filed on the remittance basis in the past can remit funds to the UK and pay a flat 12% rate of tax on those remitted funds. Outside of this two year window, the current remittance rules will continue to apply, meaning that remittances of historic income and gains will be taxable in full in the year of remittance.

This is potentially of great interest to anyone with historic overseas income and gains which they would like to bring to the UK. It should give many the opportunity to simplify matters and stop worrying about what funds they use in the UK. One would hope that those drafting the rules will have learned from the mixed fund cleansing of 2017/18 – 2018/19 and the rules will be somewhat simpler than before.

Q7 – How Will The Changes Affect Protected Settlements?

Since April 2017, non-UK trusts settled by non-UK domiciled individuals are “protected settlements” unless the settlor adds value to the trust after they are deemed domiciled in the UK, after which point they are “tainted”. Where a trust has not been tainted, income and gains of the settlement or underlying companies (with the exception of UK source income) is protected from being taxed on the UK resident settlor. This was a generous provision for non-doms in 2017 and put many in a better position than they were in under the pre 2017 rules.

If the settlor of a non-UK trust is resident in the UK on or after 6 April 2025, the tax position will be as follows:

·       For the first four years from becoming UK resident, no foreign income or gains in the trust structure are taxable on the settlor

·       From the fifth year following the start of UK residence, all income and gains in the trust structure will be taxable on the settlor

·       There will be a modified “onward gifting rule” to take account of the changes to the trust rules

Note that for someone to be considered as starting UK tax residence, they need to have been absent from the UK for a ten year period. We do not yet know if this will be ten consecutive years or if there will be some provision for those who have had limited stays in the UK in the past.

Q8 – Will I Be Able To Settle An Excluded Property Trust In The Future?

Nobody knows! – the proposed rules for IHT purposes are less well developed. The government wants to move to a residence based system for IHT as well as for income tax / capital gains tax. If the new regime is similar to the current position, individuals who have not yet been resident in the UK for ten years would be able to settle an excluded property trust prior to their being in the UK for ten years.

We don’t know if there will be transitional provisions for those who will have been in the UK for more than ten years but fewer than fifteen years at the 6 April 2025. Clients in this situation may want to consider setting up a “pilot” trust with a nominal amount in it. The process of drafting a trust deed and engaging with a suitable trustee is not quick, and so if this is already done, adding further non-UK assets to an existing trust should be more straightforward and would reduce the time pressure ahead of the new rules coming into force.

Q9 – Do The New Rules Affect How I Am Taxed As A Beneficiary Of An Offshore Trust?

Beneficiaries of offshore trusts are charged to tax in the UK to the extent that the benefits / distributions they receive are matched to income and gains within the trust structure. Accumulated unmatched income / gains in a trust structure at 5 April 2025 would remain available to match against benefits and distributions to UK resident beneficiaries.

If the settlor of the trust is not excluded and has been in the UK for four years at 6 April 2025, they will be taxed in full on income and gains from that point forward so the income / gains pools will not grow further, meaning there is a natural limit to the amount of income and gains chargeable on the beneficiary.

It is not clear what will happen if the settlor is non-UK resident or has died. We presume that the income and gains matching regime will continue in its current form so the UK beneficiary’s position will continue unchanged.

Q10 – As A UK Resident Non-Dom, Is There Anything I Can Do Now Which May Help If The Rules Come Into Force?

With the uncertainty it can be difficult for taxpayers to know what (if any) action they should be taking to plan for the rules, knowing that they may change or not come into force. Here are some ideas for those looking at concrete action at this stage. We will of course be happy to discuss individually to ensure the best position for each client.

A)    As outlined above, setting up a pilot trust to receive non-UK assets could be a useful step now. The trust could then be funded with substantial assets prior to the rule change but after we have more clarity on the rules, but could be mothballed if not actually needed.

B)     Where there are UK beneficiaries of non-UK trusts, the trusts could consider making distributions to beneficiaries’ overseas bank accounts. If the beneficiary claims the remittance basis those distributions are not taxed in the UK and provides them with funds (though those funds must not then be “onwardly gifted” to a relevant UK resident party). If the beneficiary has been in the UK for more than four years, trust distributions after 6 April 2025 are likely to be taxable in full on the beneficiary.

C)     For protected settlements that will become chargeable on the UK resident settlor the trustees should consider excluding the settlor/ their spouse and minor children from benefit in order to prevent income being taxed on the settlor on the arising basis.

D)    For those in the UK and able to claim the remittance basis – realising non-UK income and gains in 2024/25 and retaining offshore should give the opportunity to bring that money to the UK at 12% under the transitional repatriation facility.

E)     Related to (D) above, defer remitting income and gains to the UK in the short term unless absolutely necessary because a remittance in 2024/25 will be taxed at normal income and gains rates (up to 45%) whereas eligible remittances in 2025/26 or 2026/27 will be taxed at 12%.

F)     Prepare banking arrangements so that income and gains from 6 April 2025 are paid to a new account and are therefore easily identifiable. These income and gains gain be brought to the UK tax free (either because they are in the first four year FIG rules or because they have been taxed already in the UK).

G)    Consider investment strategies – so that potentially income could be accumulated below trust level, such as in an offshore bond or in a suitable offshore fund (though be ready to change strategy but don’t change strategy prematurely, before we know how these rules will finally look!).