What does the Budget mean for non-doms?

In what some might describe as a cross-party policy, the Chancellor announced widely anticipated changes to bring the non-domiciles (non-doms) tax regime more in line with UK domiciled individuals.

This has been a hot topic for a number of years, with tightening of the rules already in 2008 and again in 2017. However, it has been in the press again after it came to light that the Prime Minister’s wife had benefitted from non-dom tax status until recently.

A non-dom is an individual with an origin overseas, because they or their parents were born overseas, or someone who had previously settled permanently overseas. Under current rules, UK residents who are non-doms can benefit from the ‘remittance basis’ of taxation. This means they do not pay UK tax on their overseas income or gains when it arises, but instead only when it is brought to the UK. Typically such wealth is left overseas so it is not taxed in the UK. In addition, non-doms are not liable to inheritance tax (IHT) on the value of their foreign assets until they become deemed domiciled, which takes effect once they have been UK resident for at least 15 of the previous 20 years.

Foreign income and gains

Currently, after seven years of residence in the UK, individuals pay a charge of £30,000 to use the remittance basis, increasing to £60,000 after 12 years. After 15 years of UK residence, the non-dom can no longer use the remittance basis and must pay tax on their worldwide income and gains if they remain resident in the UK.

The reform announced by the Chancellor effectively shortens this period from 15 to just four years. It is reported this will raise £2.7 billion per year by 2028-29. It will look solely at residence, so it would seem Brits who have lived overseas for more than 10 years may also be able to benefit from the four-year regime should they return to live in the UK. We will see if that is the case when more detail becomes available.

Under the reformed rules, new arrivals to the UK who have been non-UK resident for 10 years will be exempt from UK tax on foreign income and gains arising in the first four years of residence, and they will be able to remit those income and gains to the UK without charge in that period. Once they have been UK resident for four years, they will become liable to UK tax on their worldwide income and gains in the same way as other UK residents.

Non-doms who are already resident in the UK will become taxable on their foreign income and gains in full with effect from 5 April 2025. This is unless they have become resident within the preceding four years, in which case they can also benefit from the reformed rules for the remainder of that four-year period.

Transitional rules

There will be transitional rules put in place for existing non-doms claiming the remittance basis, which will include an option to rebase the value of capital assets to 5 April 2019 values, and a temporary 50% exemption from the taxation of income in 2025/26 for those already resident for more than four years.

There will also be a two-year repatriation facility covering 2025/26 and 2026/27 which will allow individuals who have previously claimed the remittance basis to remit their pre-6 April 2025 foreign income and gains to the UK with a flat rate 12% tax charge. Access to this lower rate will not apply to pre-6 April 2025 income and gains generated within a trust or trust structure.

On first look, this appears to be more generous than the existing remittance basis, whereby previously unremitted income and gains would be taxable at prevailing rates of tax, i.e. up to 45% for income and 20% on capital gains. Perhaps not unexpectedly, the Government is expecting the repatriation facility to bring £15 billion into the UK, generating £1 billion of additional tax receipts.

The repatriation provisions could present a short window of opportunity for non-doms who wish to bring funds to the UK to do this in a more efficient manner, although of course the devil is in the detail and it remains to be seen whether a foreign tax credit would be available for overseas tax paid on the previously unremitted funds.

Reform of the remittance basis certainly may reduce the complexity of the tax rules in this area.

Such changes are also expected to impact on non-resident trusts when foreign income or gains are paid to UK resident and non-dom beneficiaries, which previously also would have been subject to the remittance basis regime. The current trust protections will cease to apply from 6 April 2025, so settlors may want to consider breaking or importing their trusts before then.

Inheritance tax

The remittance basis only applies to income and capital gains, however non-doms may also currently gain an advantage for inheritance tax as they are only taxable on UK-sited assets. By contrast, UK domiciled individuals are subject to inheritance tax on their worldwide estates.

The Government has said it will consult on ways to reform the inheritance tax regime for non-doms so it becomes a residency based test. This includes bringing non-doms within the scope of inheritance tax on their worldwide assets after 10 years of UK residence, as well as a 10-year tail to get out of the regime after leaving the UK.

No changes will be made before 5 April 2025. This is clearly at odds with previous murmurings about abolishing inheritance tax altogether, but there is now potentially a short time slot for non-doms to consider if setting up a trust by 5 April 2025 to protect their foreign assets from future inheritance tax is worthwhile, after considering the interaction of income tax and capital gains tax.

A consultation is due to take place which will limit the timeframe in which planning can be undertaken. In addition, the opposition had previously tabled a plan to abolish the non-dom regime and if there is a change in Government following a general election before 5 April 2025, there may yet be further changes afoot, particularly with reference to the proposed transitional reliefs.

This, therefore, leaves non-doms in a position where they won’t know whether they should implement planning or not ahead of the proposed regime taking effect on 6 April 2025 until after the general election and/or the consultation has ended. Waiting too long, however, could mean there is not enough time to take advice and make a well-informed decision ahead of the changes coming into force.

If you need further information on the end of the remittance basis for non-doms, we have specialists who can advise regarding residence and non-domicile issues, including offshore trusts. Please contact us should you require advice on the changes.

Read more analysis in our Spring Budget 2024 hub.