How are the rules changing to the taxation of non-doms in the UK?

Following on from previous blogs regarding the UK Government's plans for changes to UK resident, non-domiciled individuals (non-doms) are taxed in the UK, more detail has now been given on precisely what those changes will be.

Will the Remittance Basis (RB) be abolished?

The RB is to be abolished from 6 April 2025.

How will foreign income and gains (FIG) be taxed?

From 6 April 2025 people arriving in the UK for the first time will benefit from 100% UK tax relief on FIG provided that:

• the FIG arise in the first 4 years of the taxpayer being tax resident in the UK, and
• the taxpayer has not been UK tax resident in any of the previous 10 consecutive years.

This is referred to below as the 'FIG Regime'.

How will offshore trusts be taxed?

The UK Government intends to alter the existing UK tax treatment applied to offshore, settlor-interested trusts: income and gains tax protections will be removed for those non-dom / deemed UK domiciled settlors that cannot make use of the FIG Regime mentioned at 2 above.

The UK Government also intends to review the UK's existing offshore anti-avoidance regime, albeit that any review is not anticipated to result in substantive legal change before for the 2026/2027 tax year.

What happens to non-doms affected by these changes?

The UK Government has made clear that:

• Following the abolition of the RB, non-doms who cannot make use of the FIG Regime will be subject to UK tax on their worldwide income and gains. The previous administration's intention to provide a concession in the first year of the new regime will not be introduced.
  

- As a transitional measure for UK Capital Gains Tax purposes alone, current and previous RB users will be able to rebase their foreign capital assets to hold their value at the 'rebasing date'. The 'rebasing date' is scheduled to be announced in the UK Budget, now set for 30 October. 

• FIG arising pre-6 April 2025, while the RB continues to exist, will be subject to UK tax as and when they are remitted to the UK. This will also apply to remittances by those eligible to use the FIG Regime.

• Those that have historically been RB users will, from 6 April 2025, be able to use a Temporary Repatriation Facility (TRF). Remittances of pre-6 April 2025 FIG to the UK will be subject to a reduced rate of tax for a limited period after 6 April 2025. The reduced rate of tax and duration of the TRF will be determined in due course, but the Government intends to make the TRF an attractive option for eligible taxpayers – it has indicated an interest in including stockpiled income and gains in foreign structures within the TRF.
   
• The UK's Overseas Workday Relief (OWD) – a relief for RB users where earnings relating to overseas work days paid and kept abroad are only taxed in the UK if / when they are remitted to the UK – will be retained, albeit in a different form.

What is changing with Inheritance Tax (IHT)?

The plan is, from 6 April 2025, for the UK's IHT regime to change from being based on domicile to being based on residence. While there will be a formal consultation on the detail of what the new regime will look like, this will impact the applicability of UK IHT for both individuals and trusts. The detail of the new regime remains to be seen; but the UK Government has indicated that:

• Non-UK assets will be subject to UK IHT if, at the time IHT falls due (for example if they are part of a taxpayer's worldwide estate on their death), the taxpayer has been resident in the UK for 10 years beforehand. There is also to be a 'tail' to the new regime: if an individual leaves the UK they will remain subject to IHT for 10 years after having left.

- Deaths occurring prior to 6 April 2025 will be governed by the existing UK IHT regime.

- The current IHT treatment of Excluded Property Trusts will be brought to an end. The UK Government is mindful that some trust arrangements will have been put in place to take advantage of the existing tax treatment. It is considering how those arrangements can be adjusted, while ensuring that everyone that becomes subject to IHT under the new residence-based regime is treated consistently.

There is to be no formal consultation on changes to the UK's IHT or OWD regimes. Rather, the UK Government will organise engagement sessions, review feedback following the Spring Budget and carry out any relevant further engagement.

What does this mean for non-doms?

The increased clarity provided on the changes planned for how the UK taxes non-doms, and to IHT generally, is welcome. There remain areas of uncertainty and it will be important to see the detail of the legislation which is to bring about these changes; it is vital that anyone who believes they will be impacted by these changes engage with their advisors.