Clarity on the changes to the non-dom regime

Labour released a policy paper this week summarising their proposed changes to the taxation of non-UK domiciled individuals. Broadly, the changes are in line with those that were previously announced, with some subtle updates. It is expected that full detail will be announced in the 30 October Budget and the changes are still expected to apply from 6 April 2025, with some transitional provisions.

As a summary, the impact on affected individuals looks to be as follows:

• For the first 4 years of UK tax residence, an individual can claim 100% relief on FIG (foreign income and gains) provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival. 
• It seems this relief will also apply to previously UK resident individuals, regardless of their domicile status, so long as there are 10 consecutive years of non-UK residence. For example, a British national who previously moved to Spain and has lived there for 10 years could return to the UK on 8 April 2025 to be UK resident and not pay UK tax on their overseas income & gains for the first 4 years – an anomaly?!
• Previously it was announced that individuals who are unable to use the new FIG regime from 6 April 2025 (because they move onto the arising basis from the remittance basis) would benefit from transitional relief whereby only 50% of their foreign income arising in 2025/26 will be taxable. The new policy paper confirms this relief will not be available.
• Therefore, the vast majority of UK resident non-domicile individuals will be subject to UK income tax and capital gains on their global income from 6 April 2025.
• Some transitional relief may act as a plaster on this wound:
  • “Current and past remittance basis users” will be able to rebase foreign assets to a rebasing date – this will be confirmed at the Budget.
  • A Temporary Repatriation Facility (TRF) will become available on 6 April 2025 allowing taxpayers to bring foreign income and gains to the UK, which arose in a previous tax year when the remittance basis was claimed. It was previously suggested that a 12% tax rate would apply to the TRF for 2 tax years, although this will be clarified at the Budget it is expected that the tax rate would be higher than 12%.
• TRF may be extended to stockpiled income and gains within “overseas structures” (i.e. trusts and similar structures).
• Offshore structures will lose their protected status from 6 April 2025. This could result in a landscape where trust assets are subject to the 10-year charge regime with a 40% charge on the settlor’s death in some cases.
• From 6 April 2025, the protection from UK tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year FIG regime. There may be transitional arrangements such that actual changes to the taxation of income and gains within these structures may not apply until 6 April 2026.  
• In addition, inheritance tax (IHT), which is currently based on domicile, will also move to a residence based test from 6 April 2025. IHT will be charged on a worldwide asset basis after 10 years of UK tax residence, with a 10 year tail for those who leave. This 10 year tail could act as a deterrent for individuals to take up UK residence in the first place.

There is to be no formal consultation on these proposals with only stakeholder feedback prior to the formal announcements on 30 October.

Whilst the Labour policy paper provides some clarity much of the detail is missing. Affected individuals are left with just 8 months in which to consider appropriate next steps, e.g. accelerate income or disposals to the 2024/25 tax year whilst the remittance basis is still available. Overall, it makes for a difficult landscape in which to advise clients looking to move to the UK.

It remains to be seen whether we will see a decrease in individuals choosing to relocate to the UK especially if they have flexibility over their business affairs and jurisdictions in which they may reside and aren’t tied to children’s schooling, for example. Employer related moves may be largely unaffected as there are usually broader commercial reasons as to why a particular foreign assignee is needed to perform a role in the UK, though employers may need to increase the gross compensation package to take into account the impact on the assignee’s personal UK tax position after 4 years – if the assignment has not been limited to 4 years in the first place.

We are holding a virtual seminar on 31 October at 9.30am at which our tax and advisory experts will be discussing the changes announced in the Budget and how these changes could impact you and your business. To find out more and to register please click here.

If you wish to discuss this in further detail, please contact one of our Private Client Services team members.