Following the announcement of the UK General Election results, the Labour Party now has the means to implement the pledges made in its manifesto. One group of changes, which were subject to extensive commentary prior to the election, were the proposed changes to the UK's existing tax treatment of UK resident, non-domiciled individuals (non-doms). The outgoing Government did indicate an appetite to change the existing regime if it won the election (to the extent of including details in their last Budget) and the Labour Party was, broadly, supportive of most of those changes. However, there is now a need to consider (so far as one can) what the new Labour Government intends for non-doms.
What is being proposed?
In short, there is an intention to make significant changes to the UK's existing framework for taxing non-doms.
1. Abolition of the remittance basis
Currently, non-doms can elect to use the 'remittance basis' (RB) of taxation: among other things, users of the RB will be subject to UK Income Tax and Capital Gains Tax (CGT) on their UK income and gains, but foreign income and / or gains will only be subject to UK tax to the extent that they are brought (remitted) to the UK. The Labour Party has indicated that the RB would be abolished from 6 April 2025 in favour of a residence-based system, which will include:
a. A new Foreign Income and Gains (FIG) regime - the taxpayer, provided they became UK resident (under the Statutory Residence Test) after a period of 10 years non-residence, will not pay any UK tax on any FIG arising in the first four tax years after they become UK tax resident, and will be able to migrate FIG into the UK during that period without needing to pay any additional charges. The Labour Party has indicated that it may consider extending the four-year term to cover investment income. Whatever period is ultimately determined, after it has passed, the taxpayer will be subject to UK tax on their worldwide income and gains. Those ineligible to use the FIG regime will be subject to UK tax on the same terms as a normal UK resident taxpayer.
b. Non-doms that would have previously used the RB but cannot - owing to its abolition - and are unable to use the FIG regime, will be liable to UK tax on both their UK and foreign income and gains.
c. UK resident taxpayers that previously used the RB may be afforded the chance to repatriate FIG to the UK that arose prior to 6 April 2025. The Labour Party previously indicated support for this kind of measure but has not, as yet, provided any detail on what the measure would look like.
2. Adjustment to the tax protections for offshore trusts
Under the existing rules, offshore trusts established by non-doms prior to them becoming domiciled in the UK are subject to distinct tax treatment, which the Labour Party has said it intends to change:
a. FIGs within the trust, currently, only become subject to UK tax when the UK resident settlor or a beneficiary receives a benefit from the trust. The Labour Party intends to alter this from 6 April 2025: for those non-doms able to make use of the FIG regime mentioned at 1 above, during the four-year (or other) period there will be no UK tax applied to the FIGs or on their distribution. Where the FIG regime cannot be relied on or when it ends, FIGs in the trust will be taxed on the settlor as they arise.
b. Non-UK assets settled in offshore trusts by non-doms, prior to them becoming domiciled in the UK, are generally outside the scope of UK Inheritance Tax (IHT). As part of a wider change to IHT (moving from a domicile to residence-based test), the Labour Party has indicated that this exclusion will be removed: the property held in the trust will be within the scope of IHT once the settlor is within the UK IHT regime as revised, regardless of when the trust was established.
What does this mean for a 'non-dom' and how they are taxed?
While many of these changes were proposed by the outgoing Government, they do represent a significant change to how the UK taxes non-doms. It should be noted that there is currently no proposed legislation in Parliament to implement these changes, so it is difficult to know precisely how political manifesto commitments will be implemented. It is vital that anyone that is likely to be impacted by changes to the non-dom regime (and those advising them!) keep a close eye on further developments – we certainly will be doing so.
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