The non-dom reforms – where are we now following the release of the manifestos?

Following the recent release of the political manifestos and ahead of the General Election on 4 July, this blog looks at what we know regarding the proposed reforms to non-domiciled UK taxation from April 2025.

In the Spring Budget on 6 March 2024, the Conservative government announced a proposed reform to the taxation of non-domiciled individuals living in the UK from next April.  A brief technical note was published by HM Treasury summarising the proposals on 23 April 2024. Since then, no further formal documentation has been issued.

Ending the remittance basis

The overriding theme from the announcements was to remove domicile as a connecting factor to UK tax and replace it with a residency-based system.  This included the proposed abolishment of the remittance basis of taxation from April 2025 and replacing it with a new 4-year foreign income and gain (FIG) regime. The new regime would be eligible for individuals in the first 4 years of UK residence following a 10-year period of non-residence. Any foreign income and gains generated in this period would be exempt from UK tax and freely remittable to the UK. Outside of this a UK resident would be subject to UK tax on worldwide income and gains.

Transitional rules

The Government announced some proposed transitional provisions as follows:

• An option for some non-doms to rebase the value of capital assets as at 5 April 2019
• A temporary 2-year repatriation facility from April 2025 to remit earlier income and gains at a flat 12% rate; and
• A temporary 50% exemption from foreign income taxable in 2025/26

Offshore trusts

The current income tax and capital gains trust protections introduced in 2017 were also announced to be removed from April 2025. This would mean a UK resident settlor is subject to look through taxation on all income and gains generated within offshore trust structures irrespective of the source of income and gains or the settlor’s domicile status if the trust is ‘settlor-interested’.

Any new trusts established after April 2025 would also not benefit from excluded property status of UK Inheritance tax (IHT) purposes. However, the original proposals suggested that any existing trusts and any new trusts established pre-April 2025 could benefit from IHT protection subject to the settlor’s domicile status.

UK inheritance tax (IHT)

The Government said it would consult on ways to reform UK IHT with an initial proposal to bring non-doms into the scope of UK IHT on worldwide assets after they have been resident for 10 years. Alongside this the proposal announced consulting on a 10-year tail required to exit the scope UK IHT on worldwide assets.

Labour commentary

Prior to the General Election announcement Labour commented on the proposed reforms and suggested some key changes to the Conservatives proposal.

• Offshore trusts – the removal of excluded property status for UK IHT in respect of all trusts
• FIG regime – extending the regime to encourage investment in the UK
• Reduced transitional relief – removing the 50% exemption of foreign income taxable in 2025/26
• Remitting pre-April 2025 income – extending the timeframe beyond April 2027 for non-doms to remit pre-April 2025 foreign income and gains

The manifestos and non-doms

Last week we saw the release of manifestos from the main political parties. The Conservative manifesto was silent on the proposed reform to non-dom taxation. However, Labour’s manifesto made the following brief comment:

“We will abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period. We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.”

Whilst there was no mention by Labour on the timing or specific detail to the changes, the above confirms their position remains unchanged on bringing change. The direct reference in the manifesto to extending the reforms to subject all offshore trusts to UK IHT is also of note.

How to prepare for the non-dom reforms

We will soon find out who will form the UK’s next Government after the election on 4 July 2024. It is unlikely that there will be any significant update on the reforms in the weeks following the election.

However, it is clear that change is coming, and individuals should be preparing for potential reforms to be introduced from 6 April 2025. If the Conservatives remain in power, we can reasonably expect the reforms to largely take the form of the initial announcement and perhaps could be introduced from April 2025 given work was already in progress via HM Treasury and HMRC conducting listening events that are now paused. Should Labour win the election the reforms are also likely to follow the initial proposals with some modifications, in particular a wider scope on subjecting offshore trusts to UK IHT.

Whilst there remains much uncertainty as to the UK tax landscape for individuals with offshore interests, now is the time to seek advice to consider the potential impact on individual circumstances to assess where any benefits or actions may lie.   We will continue to provide further updates and key considerations for impacted individuals over the coming weeks and months.

In the meantime, please contact our experienced private client international team at PKF Francis Clark who are well placed to assist clients and contacts in discussing their circumstances.