The proposals described in this article have been amended by subsequent announcements. For our explanation of the latest version of the non-dom reforms, please read our commentary here The UK’s proposals for non-doms and their structures (as of 31 October 2024) instead.
Earlier in the year both Labour and the Conservatives had committed to reforming the taxation of non-doms and their structures. Both sets of proposals had a lot in common but there were some important differences, including, in particular, the inheritance tax treatment of existing trusts.
Labour’s election victory in July means that we now know it will be their version of the reforms which will be implemented. Subsequent announcements[1] have also clarified, somewhat at least, what they are proposing and this article summarises where things stand at present. Further details are expected to be released at the Budget on 30 October.
Please note that none of these proposals have been finalised at the date of publication and it is absolutely possible that there could be material changes before the relevant laws are enacted.
Summary
Whilst the precise scope of the new rules is still to be determined, we do have a good idea of what we think the “core” regime will look like.
We expect the remittance basis regime to be replaced with effect from 6 April 2025. Those moving to the UK will instead be able to claim a new special status in their first four years of UK residence, during which time they will be exempt from UK tax on all foreign income and gains and can bring those funds into the UK without any further income tax or capital gains tax. There may also be some form of relief for UK investment income in those years.
There will be two transitional reliefs for individuals, one which will offer a form of rebasing for foreign assets and another which will allow foreign income and gains from previous years to be remitted at a more attractive rate.
The UK’s inheritance tax rules are also likely to change, again with effect from 6 April 2025, such that individuals will be exposed to UK inheritance tax on their worldwide assets if either:
- They have been UK tax resident in the UK for 10 or more tax years (the “residency criteria”); or
- They have previously satisfied the residency criteria but ceased to be UK resident within the last 10 tax years (i.e. there will be a 10 year “tail”).
Trusts established by non-domiciled individuals will also lose many of the UK tax protections which they have enjoyed to date. In particular:
- Income and gains arising in trusts which have a living, UK resident settlor, could be attributed to and taxable on such settlor; and
- For so long as the settlor is within the scope of UK inheritance tax on their worldwide estate (see above) it is likely that the trust fund will also be exposed to UK inheritance tax.
Those affected should be taking advice and considering their options now so that they are ready to act quickly, as and when, we have more detail as to how the new rules will work in practice.
Timing
Whilst it remains entirely possible that the implementation of all or some of the new rules will be delayed, they are all (theoretically) scheduled to take effect from 6 April 2025. In its most recent policy paper (updated on 8 August 2024)[2] the government reiterated this as the target date.
The rest of this article summarises the proposals announced to date and assumes that the changes will all be made with effect from 6 April 2025 (which, in our view, is the most likely scenario).
The proposed changes for individuals
The new “4-year FIG regime”
The existing income tax and capital gains tax regime for non-doms (the remittance basis) will be abolished for future income and gains arising on or after 6 April 2025.
It will be replaced by a new special status which can be claimed during the first four years of tax residency in the UK. This has been referred to as the “4-year FIG regime” (FIG = Foreign Income and Gains).
Effect
Individuals claiming the status will not pay any UK tax on foreign income and gains arising in the tax years for which they make the claim.
They can also freely bring such funds into the UK without further tax (albeit that bringing the funds into the UK could expose them to inheritance tax as they would then become UK situated assets).
Prior to the election, Labour hinted at providing some tax relief for UK investment income arising in those years as well. They said: “We will consider whether there should be an investment incentive during the four-year window, so that UK investment income is free of UK tax and not disincentivised versus investment elsewhere in the world.”[3]
There are expected to be some drawbacks to making a claim, such as losing entitlement to the income tax personal allowances and the capital gains tax annual exempt amount. We would also assume that if capital gains are exempt then capital losses will not be allowable.
Criteria
The 4-year FIG regime will be optional. It is anticipated that individuals will be able to claim the new status in any or all of their first four years of UK tax residence.
To be eligible, an individual must not have been UK tax resident in any of the 10 tax years preceding the four-year period.
For those who first became tax resident in the UK in the 2022/23 tax year or later, such that they will have been UK resident for fewer than 4 tax years as of 6 April 2025, they will be able to claim the 4-year FIG regime for whatever is left of their first 4 years of UK tax residence.
Comment
Linking access to the new regime to residence rather than domicile will make it simpler to apply and give greater certainty to taxpayers.
As announced, it will be available for a much shorter period than the current remittance regime (4 tax years as opposed to a maximum of 15). However, where the new regime does apply, it will be more generous than the existing remittance basis in a number of ways. In particular:
- It will be available to those who want to move to the UK permanently (the remittance basis is only available to those who intend to leave the UK again); and
- It will completely exempt foreign income and gains from UK income tax and capital gains tax and will allow them to be brought into and used in the UK without any further taxation.
Transitional rules
Labour have indicated that they will adopt two of the three transitional rules proposed by the Conservatives:
Rebasing relief
There will be a form of rebasing relief for individuals who have claimed the remittance basis in the past. Previous announcements indicated that the relief would be available to those who are neither domiciled nor deemed domiciled as of 5 April 2025 but the most recent policy paper was more ambiguous and referred to “current and past remittance basis users”. It is unclear whether this indicates a change in the proposed criteria or is simply loose wording.
The policy paper also noted that “The government is considering the appropriate rebasing date and will set this out at the Budget.” (on 30 October) which is a change from the previous proposal for a rebasing date of 5 April 2019.
There may be additional conditions which have yet to be set out.
The Temporary Repatriation Facility
There is expected to be a “Temporary Repatriation Facility” (TRF) available to those who have claimed the remittance basis in the past (whatever their current status).
Previous announcements referred to a regime which would allow individuals to remit pre-6 April 2025 foreign income and gains in the 2025/26 or 2026/27 tax years and pay tax on such remittances at a flat rate of 12%.
The latest policy paper indicates that this is being reconsidered and states that:
“The rate and the length of time that the TRF will be available will be set to make use as attractive as possible.
The government is also exploring ways to expand the scope of the TRF, including to stockpiled income and gains within overseas structures, and will confirm further details at the Budget.”
It is tempting to interpret the reference to making the TRF “as attractive as possible” as a suggestion that it may be available for longer than the two years which had originally been proposed and could even offer a flat rate lower than 12%. However, there is no guarantee of this and we wait to see what the government considers “attractive” in practice.
Inheritance tax
The technical document published after the March budget (i.e. under the Conservative government) stated that “From 6 April 2025 the government intends to move inheritance tax from a domicile based regime to a residence based regime. This will be subject to consultation.”
It went on to indicate that the intention (on which views would be sought) was to move to a system where:
- People who have been tax resident in the UK for 10 years will be subject to inheritance tax on their worldwide assets; whereas
- People who do not satisfy those criteria will only be subject to inheritance tax on their UK situated assets.
There will also be a 10 year “tail” such that individuals remain exposed to inheritance tax on their worldwide assets for a further 10 years after leaving the UK.
The most recent government announcement suggested that this is still the core proposal. It says: “The government envisages that the basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with provision to keep a person in scope for 10 years after leaving the UK.”
However, it also states that “The government will engage further with stakeholders on the operation of the new test, so that any refinements can be considered fully.”, implying that the final regime could be more nuanced.
There will no longer be a formal consultation on the inheritance tax changes as was originally announced.
The proposed changes for trusts
The tax treatment of trusts established by non-domiciled settlors is due to change considerably.
Income tax and capital gains tax in relation to trusts
The current position
Currently, certain trusts established by individuals who are neither domiciled nor deemed domiciled at the relevant time benefit from “protected trust” status. This generally means that gains and foreign income arising within the trust are not taxable on the settlor(s) and are only subject to UK tax when distributions are made to UK resident beneficiaries.
The proposed changes
From 6 April 2025 the protected trust regime will effectively cease to apply, meaning that income and gains in affected trust structures could become taxable on any UK resident settlor(s) from that date.
In practice, this appears unlikely to impact trusts which:
(a) have no living settlors; or
(b) have only non-UK resident settlors (assuming the settlor(s) are not planning on moving to the UK); or
(c) have settlors who are still within their first 4 years of residence in the UK (initially at least).
For those with settlors who have been UK resident for more than four tax years, the implications will depend upon a number of factors, including the terms of the trust (exclusions could be particularly significant in determining which forms of income or gain can be attributed to the settlor) and the nature of the trust’s investments.
The latest policy paper acknowledges that the anti-avoidance regimes which can attribute trust income and gains to settlors are complex and often highly uncertain in their application. The government therefore intends to modernise them to “remove ambiguity and uncertainty in the legislation, [and] make the rules simpler to apply in practice”. This is a laudable goal. However, the government also states that no material changes will come into force until 6 April 2026 at the earliest so in the 2025/26 tax year (at least) the anti-avoidance regimes are likely to apply broadly in their current form.
Comment
Existing structures should be reviewed now to determine:
- how they might be affected;
- whether steps can be taken to reduce any negative UK tax implications (e.g. changing the beneficial class and/or the investment approach); and
- whether any other restructuring options should be considered.
Inheritance tax in relation to trusts
The current position
At a high level, trusts established by non-domiciled individuals can benefit from a broad exemption from inheritance tax for so long as they only hold assets situated outside of the UK.
The proposed changes
The government have stated that they will remove this inheritance tax protection. Their most recent comment was “The government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT. The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here.”
How this will be implemented in practice remains to be seen but our working assumption is that the inheritance tax status of trusts will depend on the inheritance tax status of their settlors. For example, it appears very possible that for so long as a trust’s settlor is exposed to UK inheritance tax on their own worldwide estate (see above):
- the trust fund will be within the scope of what is known as the “relevant property regime” (which means inheritance tax charges at a rate of up to 6% every ten years and when funds or assets leave the trust); and
- the trust fund will also be deemed to be part of the settlor’s estate (under what is known as the gift with reservation of benefit, or “GWROB”, rules) unless the settlor is excluded from benefit. This could expose the trust fund to inheritance tax at a rate of up to 40% on the settlor’s death (in addition to the 6% charges mentioned above).
Comment
This is probably the area of the new rules which requires the most clarification and there are currently a large number of unanswered questions. For instance, it is not clear how the rules will apply to trusts with excluded settlors or dead settlors.
There have been plenty of rumours that grandfathering of existing trusts remains a possibility (i.e. that trusts established before a certain date will be allowed to retain their current inheritance tax treatment). We think this is unlikely but that there will be some form of transitional rules. The government has said that it “recognises 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, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes”.
One could imagine a regime which allowed existing trusts to be wound up at a flat rate of tax for example, or gave some sort of credit for GWROB charges against the 6% ten year charges or vice-versa. However, for now this is purely speculation. More information on the new rules is expected at the Budget.
How we can help:
We have a vast amount of experience advising non-domiciled individuals and their structures, as well as those moving to and from the UK.
We can advise you as to how the new regime might impact you, help you plan your affairs accordingly and assist you in taking advantage of the transitional rules.
[1] In particular this policy paper: Changes to the taxation of non-UK domiciled individuals - GOV.UK (www.gov.uk)
[2] Changes to the taxation of non-UK domiciled individuals - GOV.UK (www.gov.uk)
[3] Labour’s plan to close the non-dom loopholes