Replacing the Non-Dom tax rules – an explainer

18 April 2024

Notes

This explainer supplements the pre-Budget explainer published by CIOT in March 2024. That explainer gives a general overview of the definitions and the issues around non-doms and UK taxation. This explainer focuses on the changes announced in the March 2024 Budget. It also covers briefly how Labour’s approach differs from the Conservatives’.

Q. What did the Chancellor announce in the Budget?

He announced that the government will be abolishing the remittance basis of taxation for non-UK domiciled individuals (non-doms) in relation to foreign income and gains arising from April 2025 and replacing it with a simpler, residence-based system.  However, the remittance basis remain in place for foreign income and gains arising before April 2025 and therefore the current rules determining when something is remitted will remain relevant for many years. 

The remittance basis currently enables someone who is resident, but not domiciled, in the UK to be taxed on their foreign income and gains (FIGs) only insofar as they are ‘remitted’ (i.e. brought into) the UK. (This is generally limited to 15 years of UK residence, after which they are ‘deemed domiciled’ in the UK and taxed on all their personal foreign income and gains thereafter arising whether or not remitted.)

Q. Does this mean everyone resident in the UK will pay tax here on their worldwide income from day one?

No. The rules will be different for the first four years of UK residence.

Those who have 10 years’ consecutive non-UK residence and are within the first four years of being resident in the UK will be able to bring FIGs arising in those years into the UK without paying tax on them (although they will lose their UK personal allowance for income tax and annual exemption for capital gains tax - CGT). A claim for each of those four years will have to be made – it is not treated as a single allowance window for the purposes of making claims. Split years and treaty non-residence years are also counted as years of UK residence in determining the four-year window and ten year period of non-residence.

Those who are already in the UK, but have been here for less than four tax years, can still benefit from this change up to the start of their fifth year of residence. The change provides a much more generous relief than the current regime in that it is a complete and permanent exemption but it lasts for a much shorter period. 

Q. Will there be transitional rules for this new regime?

Yes. Those who move into the new regime in April 2025 without the benefit of the four-year rule (i.e. they have been UK resident for at least four years but are not yet deemed domiciled ) will only pay tax on 50% of their foreign income (but not gains!) in 2025/26. It is not yet clear whether they will need to claim the remittance basis in 24/25 or whether it is sufficient that they have done so at some point in the past.   From 2026/27, they will pay tax on all their income on the arising basis. That is, they will be taxed by the UK on their worldwide income and capital gains (subject to mitigations and reliefs designed to avoid double taxation).

For any person who has claimed the remittance basis in the past (even deemed domiciled taxpayers), there will be the opportunity to elect to pay tax at a rate of 12% on untaxed FIGs in 2025/26 and 2026/27 as part of a ‘temporary repatriation facility’. This will not apply to FIGs generated within trusts or trust structures, but is meant to encourage the remittance of FIGs into the UK (which the existing regime arguably is not doing). The mixed fund ordering rules will be relaxed when taking advantage of this facility, although to what extent and for how long is currently unclear.

Those who are not, or cease to be, eligible for the four-year window and were not deemed domiciled in 25/26 can rebase assets held personally at 5 April 2019 to its value at that date for CGT purposes. It is unclear exactly how this rebasing will work, over what assets and for how long it will last. 

Q. What about Overseas Workday Relief?

Overseas Workday Relief is a relief currently available to non-doms who claim the remittance basis of taxation and are in their first three years of residence in the UK. It enables earnings related to workdays spent overseas to be paid and retained overseas. Such earnings are then taxable in the UK only to the extent they are remitted to the UK.

Under the new system Overseas Workday Relief will remain for those employees within their first three years of residence, but will be simplified. The new rules will give relief to earnings irrespective of whether they are remitted to the UK, but, as now, will not apply to National Insurance contributions.

Q. What about the inheritance tax rules?

A major change to the IHT rules has been announced.  Domicile will no longer be a relevant connecting factor for chargeable events from April 2025.  Instead there will be a residence based rule with an initial ten year exemption period for new arrivers who have not previously been UK resident for ten consecutive years irrespective of their domicile.  Trusts set up before April 2025 will continue to operate under the current IHT regime and therefore be excluded property trusts even in respect of future chargeable events.  The government are going to consult on the detail of the IHT changes including whether there are to be any other connecting factors. 

It is not clear how the ten years will be counted in respect of the initial ten year exemption period and other details remain unresolved. However, the ten year IHT tail may affect those who have already left the UK.  

Q. What about offshore trusts?

Changes made in 2017 allowed a non-dom to preserve favourable tax treatment certain income and gains provided they were generated from assets settled into trust.    In brief, a non-UK resident trust remained excluded from UK income tax and CGT even after the settlor became deemed domiciled provided it was set up and funded prior to the settlor becoming deemed domiciled.  These so-called “trust protections” were complicated and depended on a number of conditions including avoiding additions of value to the trust, the settlor retaining foreign domicile as a matter of law and the trust  generating no accrued income or offshore income gains. 

Under the new regime, from April 2025 all income and gains generated within any non-resident trust structures are taxable on the settlor after the first four years of UK residence if they are able to benefit from the trust and are or have been resident here more than four tax years.  Even if the settlor and spouse/civil partner are excluded, if any of their children or grandchildren or their respective spouses can benefit then gains within the trust structure are still taxable on the settlor while he is UK resident.   The IHT excluded property rules will not change in respect of pre 2025 trusts whatever happens to the settlor’s domicile or residence status if they were not born here with a UK domicile of origin  (although of course whether this generous carve out changes under a Labour Government remains to be seen).

Q. What does CIOT think of these changes?

Moving from domicile to residence as the basis for taxing people who are internationally mobile makes sense. As well as being a major simplification, it is a fairer and more transparent basis for determining UK tax.   Residence will be based upon the Statutory Residence Test which means it is far more objective and certain than the concept of domicile.

We have, however, criticised the government’s failure to consult ahead of announcing the change, and we have warned that a four-year exemption grace period is a drastic reduction from the current 15 years remittance basis.  (More here.) However, we accept that the year allowed for implementation of the changes gives foreign doms time to consider their options and the exemption period, although short, is a major simplification and improvement over the current complex remittance rules.  It is hoped that the TRF can be framed so that it will encourage as many people as possible to take advantage of the relief and thus reduce the amount of untaxed foreign income and gains and the navigation and enforcement of complex remittance rules.  It should also be remembered that determining someone’s domicile under common law was not straightforward and therefore the trust protections were always vulnerable to HMRC enquiry. 

Q. So will non-domicile status no longer exist after 2025?

Domicile is a general law concept, applicable in a number of legal contexts including succession law, jurisdiction claims and the validity of wills. Nothing changes here.   The 2024 Budget changes simply remove domicile as a relevant connecting tax factor from April 2025.  However, it will still be relevant in determining the IHT position of trusts set up prior to April 2025.   The position is greatly simplified and complex rules such as the deemed domicile rules (four operate for IHT purposes!) will cease to be relevant going forward provided the settlor was not deemed domiciled when they set up a trust before 6 April 2025 or died before that date. 

Q. What difference will the 2025 changes make to the UK tax liability of those affected?

After four years’ residence under the statutory residence test in the UK, an individual will be subject to the arising basis of tax i.e. their worldwide income is subject to UK tax irrespective of whether they bring monies into the UK or not. For those who have kept FIGs offshore and enjoyed the remittance basis with no UK consequences, the changes will make a significant difference. However, many of those will also have paid a remittance basis charge of either £30,000 or £60,000 after seven or 12 years’ residence respectively on top of tax on their remittances, so the difference on their UK tax liability might be more limited once those charges disappear. From April 2025, the effect on their UK tax liability will depend on the levels of their FIGs rather than whether they remit them.

Q. How much will the changes raise for the Exchequer?

The government predict that the changes will raise an extra £2.7 billion a year by 2028-29. (See the ‘scorecard’ on pages 65-68 of the Budget Red Book.) with an additional £1 billion on the TRF.

Estimates of this kind are inherently highly uncertain as behavioural effects of the changes are hard to predict. There is some pre-Budget consideration of these issues in the ‘Potential Revenue’ section of this IFS briefing. Our previous explainer has more about who non-doms are, how many of them there are and how much tax they pay already.

Q: What will happen if there’s a change of government?

Good question – as there has to be a general election by January 2025 at the very latest.

Labour have said they support most aspects of the proposed replacement to the non-dom rules, including the 4-year arrival window and the 10-year window for IHT, but they want to address what they consider to be ‘loopholes’ in the current government’s plan.

Specifically they have taken aim at the proposals to tax only 50% of foreign income in 2025/26, and the lack of change to rules surrounding protected offshore ‘excluded property’ trusts settled before April 2025. Labour’s proposal is to remove the protections for such offshore trusts, as well as removing the 50% taxable foreign income concession for 2025/26. They have also suggested exploring ways to address stockpiled FIGs and how an incentive might be put in place to bring these into the UK once the Temporary Repatriation Facility ceases to take effect after 2026/27. (More here.)

Q: Will the legislation have passed before an election?

We don’t know. Without an election we would expect this to be legislated in a Finance Bill following an Autumn Statement. But most likely election timetables mean that any such bill before the election would need to be rushed through and, if the calling of an election intervened, would by convention mean opposition agreement would be needed for legislation to be nodded through. It is unclear whether this would be granted. In any event there would probably be time for further post-election legislation to either establish the new regime with any changes to the plan desired by a new government or for a new government to amend the legislation introduced by the old government before it takes effect at the start of April 2025. However there wouldn’t be a lot of time for consultation, and this would be a less than ideal way to legislate major tax changes!

This explainer was written by:
Chris Thorpe, Technical Officer (Private Client), Chartered Institute of Taxation
George Crozier, Head of External Relations, Chartered Institute of Taxation

With additional content from Emma Chamberlain, Co-Chair, CIOT Private Client (UK) Committee