Boxnote: Changes to Non-dom Tax Regime
What does the end of the ‘non-dom’ tax regime mean? Audley Policy Director Chris Maitland answers.
Summary
On Monday, HM Treasury released a policy paper confirming the abolition of the so-called ‘non-dom’ tax regime for non-UK domiciled individuals will go ahead on 5 April next year. At the same time, Chancellor Rachel Reeves confirmed the Autumn Budget will be held on 30 October 2024 where further details will be set out.
The changes will significantly reduce the tax privileges available to wealthy individuals living in the UK but domiciled for tax purposes elsewhere. Tax experts are divided as to the extent to which the changes will cause an exodus of High and Ultra-High Net Worth Individuals who currently claim non-dom status.
The proposal eliminates the concept of domicile in tax matters in favour of a residence-based system and restricts the timeframe during which individuals can enjoy tax privileges on foreign income and gains (FIG). Non-dom status will disappear entirely. Instead, individuals moving to the UK who have not been resident for tax purposes in any of the preceding 10 years will be able to apply to exempt foreign profits, including income and gains, from UK tax for a period of four years, rather than the previous fifteen.
This Audley briefing note sets out a quick refresher on what the current non-dom regime is and summarises some of the changes the current government are planning to roll out.
What is a non-dom?
A non-UK domiciled individual, or non-dom, is someone living in the UK whose permanent home, or domicile, for tax purposes is outside the UK. This status pertains to a person's tax obligations and is separate from their nationality, citizenship, or residency, although these factors can influence it.
The UK has long had a special tax regime for non-UK domiciled individuals. This regime, known as the “remittance basis,” broadly provides tax relief on non-UK income and gains for non-doms, as long as these funds are not brought into or spent in the UK.
For High and Ultra-High Net Worth Individuals, this status can lead to substantial tax savings if they designate a country with lower taxes as their domicile.
The regime underwent significant amendments in 2008 and again in 2017, introducing an annual charge and capping the regime at a maximum of 15 years. However, non-doms have still been able to arrange their affairs and reside in the UK for extended periods with minimal or no UK tax liability. The number of people qualifying as non-dom in the UK is around 70,000, up from a slight dip during the pandemic.
How are the non-dom rules changing?
In March 2024, Conservative Chancellor Jeremy Hunt declared that the non-dom tax regime would be phased out over time. The new Labour government has largely adopted his plans but with some important qualifications.
Key among the changes is that the category of non-dom and the accompanying 15-year period will be replaced by a regime based on residence.
‘Domicile’ is a distinct concept in English law that lacks a statutory definition and is determined by an individual's intentions. As a result, it can be challenging to evaluate. UK ‘residency’ is based on a clear statutory test which will make the test clearer and simpler to apply.
Individuals moving to the UK from April 2025 will be exempt from paying tax on overseas income for the first four years only. To qualify, the individual must not have been a UK resident in any of the preceding 10 years.
After the four-year period is over, they will be subject to the same tax rules as other UK residents. Current non-doms will be granted a two-year transition period to integrate their foreign wealth into the UK tax system on favourable terms.
As the Treasury document states:
“The government will remove preferential tax treatment based on domicile status for all new foreign income and gains (FIG) that arise from 6 April 2025. To replace the remittance basis of tax, the government will introduce an internationally competitive residence-based regime, providing 100% relief on FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival.”
However, the new government’s proposals go further than those of their predecessors. Jeremy Hunt proposed a transition arrangement that would allow for a 50% reduction in the amount of foreign income subject to tax during the first year of the new regime for existing non-doms who lose access to the remittance system. The new Labour government has scrapped this loophole and will introduce their new scheme in full from day one.
In addition, the new government is committed to closing the loophole that allows non-domiciled individuals to avoid UK inheritance tax (IHT) on overseas properties and other assets through the use of Trust structures. Non-UK assets will now be brought into the new residence-based scheme as of 6 th April 2025. This is a controversial change that applies to both new and existing trust structures. As a result, the policy paper states that the government “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”.
As part of the overall reforms, the government intends to conduct a review of legislation intended to address tax avoidance generally. They will provide further information on this in due course.
What impact will this have?
Experts are divided on the impact the new regime will have on existing non-doms.
In many ways, the government’s announcement only confirms the plans outlined by their predecessors. However, they have tightened some loopholes and made the regime harsher in places. As the policy paper states: “[the last government’s] approach left several advantages for existing nondoms, which the government is committed to ending”.
Equally, the new rules come on top of other changes to tax policy that may be considered unfavourable – notably the decision to go ahead with the introduction of VAT on private school fees immediately, rather than later in the parliament as had been expected. This will likely increase costs for parents who choose to educate their children privately. Further significant tax hikes are also expected in the Budget in October. These are likely to focus on Capital Gains Tax and on the stated policy to increase tax rates on so-called ‘carried interest’ in private equity.
Richard Thomson-Curtis, tax advisor at Sanctoras, predicts that it’s likely there will ‘be a certain level of outflow from the UK’ for those for whom those tax benefits were a key factor in coming to the UK and who may not benefit from the new rules (as they’ve been residing here for more than four years). He also notes that ‘there will be a significant proportion of non-UK domiciled individuals for whom tax was not the driver for initially coming to the UK, with personal reasons such as education, family, or certain employment opportunities being the motive. For these people, the proposed changes are not likely to force their departure from the UK.’
This note is intended as a policy explainer and should not replace tax advice tailored to individual circumstances. For more information, please get in touch to discuss further at info@audleyadvisors.com.
By Chris Maitland, Policy Director at Audley.
Image credit/HM Treasury/License