Proposed reforms to the 'non-dom' regime following the March 2024 budget

On 6 March 2024, chancellor Jeremy Hunt delivered his budget speech and secured his place in the tax history books by announcing the government would bring to an end the 'non-dom' tax regime.

The government’s published budget statement says that the non-dom tax regime will be abolished and replaced with a fairer system from April 2025, where new arrivals to the UK pay the same tax as everyone else after four years.

The budget speech was followed by the publication of a policy paper entitled: “Technical note: Changes to the taxation of non-UK domiciled individuals” (the “policy paper”).

Whilst the announcement has widely been dubbed an “abolition” of the non-dom regime, it would be more accurately described as a replacement regime.

Broadly speaking, successive governments have concluded that the non-dom regime is valuable for the UK, as it encourages wealth-creators to locate to the UK, resulting in tax revenue from people who otherwise may not decide to live or invest there.

The chancellor of the exchequer echoed this sentiment when he stressed the importance of protecting the UK’s attractiveness to international investors and stated that the new regime aims to introduce a system that is “fairer and remains competitive with other countries”.

Indeed, it would seem that the government’s new proposals have addressed the most perverse element of the current remittance basis regime which encourages people to move to the UK but keep their created wealth outside of our economy.

Under the new proposals, individuals will no longer be dis-incentivised from bringing their foreign income and gains to the UK in the way that they have been under the remittance basis regime.

Foreign income and gains regime

Proposals affecting individuals

From 6 April 2025, the remittance basis regime will be abolished and replaced with a new residence-based tax system under which new arrivers to the UK, or individuals returning to the UK after at least 10 years overseas, can elect not to be taxed on their foreign income or gains during the first four years of UK tax residence (the FIG regime).

Electing into the FIG regime will result in the loss of personal allowances and the capital gains tax annual exempt amount as is the case for remittance basis users.

However, qualifying individuals will not be taxed on their foreign income or gains regardless of whether that income or those gains are brought to the UK.

They will also be able to receive distributions from offshore trusts without paying UK tax on those distributions.

Current remittance basis users who have been in the UK for fewer than four tax years on 6 April 2024 will be eligible for the FIG regime for the remainder of their first four years of UK tax residence.

Individuals who have already been resident in the UK for four tax years on 6 April 2025 will not be eligible for the FIG regime and will be subject to UK taxation on their worldwide income and gains as it arises. However, the following concessions are offered to “soften the blow”:

• For 2025/26 only, individuals moving from the remittance basis to the arising basis of taxation will only be subject to UK tax on 50% of their non-UK source income arising in 2025/26
• Individuals who have claimed the remittance basis and are neither domiciled nor deemed domiciled in the UK on 5 April 2025 will be able to elect to rebase a personally held foreign asset to its 5 April 2019 value on disposal provided they held the asset at 5 April 2019
• A so-called Temporary Repatriation Facility (TRF) will be available for 2025/26 and 2026/27. The TRF will allow individuals to bring to the UK pre- 6 April 2025 income and gains to which the remittance basis has applied at a reduced rate of tax of 12%. The TRF will not apply to pre-6 April 2025 foreign income and gains generated within trusts or trust structures. This measure includes a “relaxation” of the mixed funds ordering rules with the objective of simplifying the process, but no detail on this is available yet

Individuals returning to the UK having spent a period of over 10 UK tax years overseas will be able to benefit from the FIG regime on their return.

In many cases, these individuals will have more favourable tax treatment under the new proposals than they do currently, this is particularly true for UK domiciled returning ex-pats and those who fall into the category of “formerly domiciled residents” under the current rules.

Proposals applicable to settlors and beneficiaries of offshore trust structures

The protections afforded by the “protected settlements” regime introduced as part of Finance (No.2) Act 2017 are to be abolished with the result that income and gains arising to the trustees of a settlor-interested trust will be attributed to its UK resident settlor and, where the settlor is not eligible for the FIG regime, taxed in their hands on the arising basis.

Where a UK resident beneficiary is in receipt of a benefit from an offshore trust and is eligible for the FIG regime, the distribution or benefit will not be matched with trust income and gains – thus preventing the washing out of income or gains through distributions to UK resident beneficiaries in their first four years of UK tax residence.

The so-called “onward gift rules” will also be modified, although no details of proposed modifications have been published.

UK resident beneficiaries who are not eligible for the FIG regime will be taxed on the arising basis on benefits received from an offshore trust that are matched with trust income or gains.

Inheritance tax

The government will enter into a consultation to move from a domicile-based system for UK inheritance tax (IHT) to a residency based one with effect from 6 April 2025. We await news of when the consultation document will be issued, but presumably it will be very soon.

Under the current system, UK domiciled and deemed domiciled individuals are within the scope of IHT on their worldwide estates, whereas non-UK domiciled individuals are only within the scope of IHT on assets situated in the UK and certain categories of non-UK situs assets connected with UK residential real estate.

The new residency-based system will bring all individuals within the scope of IHT on their worldwide assets after 10 years of UK tax residence (the residence criteria) with the provision that once an individual meets the residence criteria they will remain within the scope of IHT on their worldwide assets for 10 years after leaving the UK (the tail provision).

The IHT consultation will consider various issues such as transitional provisions, the length of the residence criteria and tail provision, any connecting factors other than residence, gifts with reservation, domicile elections, formerly domiciled residents and calculation of trust charges.

Trust property settled prior to 6 April 2025 that meets the current legislative requirements of “excluded property” will continue to be outside of the scope of IHT on a 10-year anniversary or earlier exit from the trust.

The interaction between the gift with reservation of benefit rules and excluded property trusts will remain unchanged such that excluded property will not be brought into charge on a settlor’s death even if the settlor retains a benefit in the trust.

From 6 April 2025, where new trusts are settled, the relevance of that settled property for IHT will depend on whether a settlor meets the “residence criteria” or the “tail criteria” at the time the assets are settled and/or on 10-year anniversaries or earlier exits from the trust.

Effectively, the IHT status of the trust property will mirror that of its settlor.

What's next for non-doms and tax?

These changes to the non-dom regime were described on budget day by ITN’s political editor Robert Peston as the closing of one of the last vestiges of Thatcher’s Britain.

It is a regime that the Blair and Brown Labour governments have enthusiastically continued and it has remained with us since. Will the changes now lead to a further exodus of non-doms?

Non-doms, tax practitioners and HMRC officials alike will have to accustom themselves to a world of tax planning without the use of the concept of “domicile”. It will be quite a change.

The big unknown in all this is how an incoming Labour government will respond to these changes, assuming Labour win the forthcoming general election.

Will they respect the proposed changes, or change them further? This unknown will not make it easier for non-doms and their advisers in deciding what actions to take in response to the proposed changes.