Further information released on proposed changes to the “non-dom” tax regime

Following our previous blogs discussing the initial ‘non-dom’ announcements by Jeremy Hunt and the subsequent update prior to the general election, further information has been released on the proposed changes to the ‘non-dom’ tax regime.

 What has happened since then?

The Labour party won the general election with a record majority in parliament and their first budget has been set for 30 October 2024. They’ve now released an updated non-dom tax policy paper outlining proposed changes. Subsequently, further details on planned engagement with stakeholders have been published, with more details expected to follow before the final policies are confirmed in the Budget.

Political notes and balance

The background to the new paper states that “the government is committed to addressing unfairness in the tax system” but goes on to say that “the government will also review some other key areas of the previously announced reforms to ensure that the new regime is both fair and as competitive as possible.”  

The government has a difficult task in finding the balance between fairness and remaining competitive. If they push too hard in trying to find a perceived fairness, then we can clearly see an issue in remaining competitive as those non-doms who can be mobile will choose another location that’s more attractive. In doing so, the UK will lose out in tax-take overall as those non-doms already pay higher UK tax than others, and additionally, contribute hugely to the economy through other means - for example by spending here, running businesses and employing staff.

Some have commented that the 2017 changes didn’t have the effect of reducing tax-take but those changes were not as fundamental (due mostly to the retention of many tax advantages under the ‘protected trusts’ regime) and were generally accepted by those individuals as a fair price to pay for staying in the UK. Changing the rules now so significantly will be a bridge too far for many.

The new policy

We have summarised the points from the policy paper below and included our commentary:

Tax on income and gains

• The changes will be effective from 6 April 2025

Originally, there was some debate about whether certain points would be delayed given the quantum of the proposed changes, but as the general election was earlier than expected it looks set that the changes will be effective from 6 April 2025.

• New arrivers, being those who haven’t been UK resident in the prior 10 years, will benefit from the 4-year FIG regime as previously stated.

There is no change on this point from the previous announcements and so the remittance basis will be gone for new ‘foreign income and gains’. The FIG regime will mean overseas income and gains are exempt, but can still be remitted to the UK, free of tax.

• Protected settlement rules for trusts will be abolished and so those settlor/beneficiaries not able to claim the new FIG regime will be liable to full UK taxation on the Trust’s income and gains going forward.

This is widely as expected based on the previous announcements. The lack of any comment on transitional rules for existing trusts, save for potentially on IHT as below, suggests that there will definitely be no grandfathering provisions as already broadly expected. It must be remembered that the ‘settlor-interested’ provisions for capital gains are very broad, with the inclusion of grandchildren being sufficient for gains to be taxed on the settlor.

• The government will review certain offshore anti-avoidance legislation including the Transfer of Asset Abroad and Settlements legislation. Any changes are expected to be effective from 2026/27 at the earliest.

This will be a welcome change to avoid certain ambiguities as long as the rules become simpler and clearer rather than more cumbersome.  The timing may prove an issue as it would be cleaner to align any changes to the introduction of the new FIG regime.

• A form of Overseas Workday Relief (OWR) will be retained and they will engage with stakeholders in August on the design of the new rules.

As expected, this is likely to be a welcome simplification for those moving to the UK to work, and may even benefit many returning UK expats if they’ve been overseas for 10 years or more.

• The original Conservative policy was to give a 50% reduction for foreign income for those who lost access to the remittance basis in 2024/25 - this will no longer be the case.

It was expected that Labour would scale back some of the transitional provisions given their previous statements. For those non-doms moving to the new regime, it will increase the impact in year 1 rather than allow a ‘soft transition’.

• Non-doms, who are current or past remittance basis users, will be able to rebase capital assets for CGT purposes for disposals post 6 April 2025 – although the rebasing date will not be confirmed until the Budget.

This is a welcome transitional relief as it would otherwise mean certain non-doms would need to manufacture disposals in the current year to obtain some sort of rebasing. It’s unclear when the rebasing will apply from, but this will be announced at the Budget. The conservatives stated a date of April 2019 which didn’t align with the rule changes and so a current date of April 2025 would seem more appropriate. However, it seems likely that the choice of rebasing date will be heavily influenced by the associated cost and the desire to demonstrate that non-doms will be paying their ‘fair share’ of taxes.

• Any overseas income or gains previously protected under the remittance basis will remain taxable upon remittance post 6 April 2025. The Temporary Repatriation Facility (TRF) will be available, though the tax rate (previously stated at 12%) and length of the facility (previously stated at 2 years) are not yet determined.

Some sort of relaxation of the remittance rules is welcome to attract inward investment into the UK and to tidy up any overseas accounts, but they should be simplified further.

• The government is exploring ways to see if the TRF can be expanded, including to cover stockpiled income and gains within overseas structures.

In principle, this is a very welcome change but in practice this can be extremely difficult as you generally need some sort of starting point to work from, which is often the issue in the first place. It will be interesting to see if the new rules around this can be practical enough to be useable. It seems likely that the government will look to make the TRF attractive in order to both encourage investment in the UK and perhaps accelerate some tax revenue from non-doms looking to simplify their affairs.

 Inheritance tax

• IHT will move to a residence-based test rather than the current dependency on domicile, from 6 April 2025. The policy paper states that they ‘envisage’ that the basic test will be whether the individual has been UK resident for the 10 years prior to the tax year in which the event (death, or transfer into trust) occurs, with provision to keep a person in scope for 10 years after leaving the UK. They state that they will engage further with stakeholders on the operation of the new test, so that any refinements can be considered fully.

The 10-year tail seems extraordinarily long and unfair to those who have only been in the UK for a relatively short period of time. It would be welcome if this tail is reduced, or the rules are structured in some other way to create a fairer system for those temporarily visiting the UK. They have stated they will not have a formal consultation but will instead review stakeholder feedback following the Spring Budget and will carry out further external engagement over the summer on IHT policy design.

• The use of Excluded Property Trusts (i.e. Trusts holding overseas assets created before the settlor obtained UK deemed domicile) to avoid IHT will be removed. The policy document then goes on to say “The government 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. Confirmation of these new rules and their detailed application, including transitional arrangements for affected settlors, will be published at Budget, following external engagement.” 

The balance between fairness on both sides is a difficult task to manage. The wording “including transitional arrangements for affected settlors” will be welcome for those affected but it’s unclear if this will lead to any significant grandfathering provisions (with the Labour Party criticising the original Conservative proposals to retain IHT protection for such trusts established before April 2025). Those with offshore trust interests should watch this space carefully to see how the changes will impact them from 6 April 2025.

What should I do now?

Non-doms who may be affected should consult with their advisers urgently to see how these changes will affect them and to consider alternative options to mitigate the additional exposure.

How we can help?

We understand the complexities of the proposed changes to the non-dom tax regime. We can provide tailored advice on how they may impact you and assist in reviewing what other options you may have. If you would like to have a confidential conversation with our experts, please contact Tax Partners, Phil Moss (philmoss@lubbockfine.co.uk), or David Portman (davidportman@lubbockfine.co.uk).