Changes to the taxation of non-UK domiciled individuals

The previous UK Government announced, at the 2024 Spring Budget, the ending of the UK's current favourable tax regime for those UK residents without a domicile in the UK (so-called “Non-Doms”). 

Yesterday, the current Government issued a policy paper regarding the changes to the taxation of non-UK domiciled individuals to clarify their position. The key points include:
 
Remaining the same:
 
  • The current non-dom rules are still expected to be abolished with the introduction of new rules from 6 April 2025
  • Under the new rules, new arrivals to the UK will be subject to tax only on their UK source income, with foreign source income and gains (“FIG”) exempt from UK tax. They will benefit from this regime for the first four tax years of UK residence, provided they have been non-UK resident for 10 years prior to their move to the UK.. It is interesting to note that FIG will not be taxed in the UK during the four-year period, regardless of whether it is remitted to the UK or not. 
  • The UK Government still intends to replace the current domicile-based system for Inheritance Tax (“IHT”) with a new residence-based system from 6 April 2025. The test as to whether non-UK assets will be in scope of IHT still follows the previous proposal and depends on whether an individual has been resident in the UK for 10 years prior to the tax year of the chargeable event. The same suggested “tail” of 10 years was also confirmed in the policy paper meaning that individuals in scope of UK IHT, leaving the UK, will remain in scope of UK IHT for ten years after departure from the UK.
 
Changes / updates:
  • The policy announced by the previous Government, providing a 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime, will not be introduced.
  • The previous Government proposed that a special regime would apply in 2025/26 and 2026/27 where anyone who has benefited from the remittance basis and retains unremitted income and gains outside the UK would be able to remit these income and gains to the UK in these two years and benefit from a favourable tax rate of only 12%. The policy paper issued yesterday confirmed that there will be a temporary repatriation facility, however there was no confirmation regarding the rate of tax or the period to which the transitional rules would apply.
  • The policy paper also confirmed that current and past remittance basis users will be able to rebase foreign capital assets they hold, when they dispose of them. The previous Government proposed a rebasing date of April 2019, meaning that only the gain arising since that date would be taxed; however, the official rebasing date will be confirmed in the October 2024 Budget.
  • The new policy paper announced that the Government intends to end the use of Excluded Property Trusts to keep assets out of scope of UK IHT. We expect to see the loss of ‘protected trust’ status. This will impact Trusts with settlors who set up Trusts whilst non-dom who have then become UK tax resident long enough to be considered deemed UK domiciled. The Government have acknowledged that ‘trusts will already have been established and structured to reflect the current rules, so is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements’. Confirmation of these new rules including transitional arrangements will be announced in the October Budget.