Non-Dom Tax Changes – Navigating The ‘Tax Twilight’ Zone

Updated: 3rd June

Rarely has the concept of non-UK domicile status and its impact on how an individual is subject to tax in the UK been in the headlines so much as in recent years. This is in part due to the wife of Prime Minister Rishi Sunak’s prior use of the non-dom regime, and more recently its perceived importance as a means of funding manifesto pledges – as evidenced per the 2024 Spring Budget and Labour’s subsequent proposals for the regime.

What are the existing NON-DOM tax rules?

Under current rules, where an individual is non-UK domiciled, they are able to access several methods of UK tax mitigation, namely:

• The remittance basis of taxation, which allows for overseas income and gains to be sheltered from UK income and capital gains tax for up to 15 years of tax residence, provided that these overseas sources are not brought (remitted) to the UK, and
• Excluded property status for UK inheritance tax purposes on non-UK situs assets – excluded property assets are not subject to UK inheritance tax.

It is clear that there are pros and cons with the current regime, it undoubtedly offers favourable tax treatment to wealthy individuals who can retain non-UK domiciled status. However, as a counter to that, it attracts internationally mobile and often wealthy individuals to the UK, capturing their UK sources within the income and capital gains tax net. In theory, there is a wider benefit to the UK– it captures VAT on their UK spending, Stamp Duty Land Tax/Land & Buildings Transaction Tax on the acquisition of a UK home, and if they remain in the UK for long enough, inheritance tax on some or all of their assets.

With that being said, the sentiment of the current Conservative Government and indeed Labour ahead of the impending general election is that the regime is too generous and should be replaced by one which is more in line with that which is offered in other European countries such as Italy and Spain. While there are lots of uncertainties at present, what is certain is that we are headed for change in the way in which non-dom’s are taxed in the UK from 6 April 2025.

What Are The Proposed Non-Dom TAX Changes?

Income and capital gains tax

Several key changes were announced in the Spring Budget 2024 related to income tax and capital gains tax, namely:

• Abolition of the non-dom regime from 6 April 2025 which will result in a removal of the remittance basis of taxation,
• Transitional reliefs to soften the blow for existing non-doms, and
• A new residence-based regime for new arrivals in the UK (who have previously been non-resident for 10 consecutive years).

We have covered the 2024 Spring Budget announcements about non-dom’s. If you’re looking for a summary you can find it in our previous blog.

Subsequently, the shadow Chancellor Rachel Reeves has announced that should Labour succeed in the next general election, they will go one step further and tighten the transitional reliefs as above.

Inheritance Tax

There are proposed wide-ranging changes to inheritance tax as a result of the abolition of the concept of domicile, these changes are due to be subject to further consultation, but as of the Spring Budget 2024, it was proposed that from 6 April 2025:

• Inheritance tax is to move to a residence-based system, whereby all individuals will be within the scope of inheritance tax after 10 years of UK tax residence,
• A ten-year tail will apply meaning that once an individual is within the scope of UK inheritance tax, they will remain so for a further 10 years.

The proposed changes would represent a drastic reform to the current regime, and we are yet to receive further detail or draft legislation, but on the face of it the proposed changes present some interesting considerations:

• Individuals can potentially mitigate their exposure to UK inheritance tax by managing the number of years that they are UK tax residents and departing the UK ahead of the 10-year test being met.
• Under current rules, individuals who are UK-domiciled but are tax residents outside of the UK are within the scope of UK inheritance tax, such individuals may benefit from the proposed changes and fall outside of the inheritance tax net by being a long-term non-UK tax resident.
• Whether there is a greater need than ever before for new inheritance tax double taxation agreements between the UK and other jurisdictions. These agreements are fundamental to preventing individuals from being subject to UK inheritance tax and an equivalent tax in an overseas jurisdiction (there are currently just 6 inheritance tax agreements and 4 older estate duty agreements).

Impact on offshore trusts

Perhaps a less widely published impact of the Spring Budget 2024 proposed changes relates to offshore trusts and in particular UK resident settlors who can benefit from an offshore trust.

Under current rules where an offshore trust has been settled by a non-UK domiciled individual:

• Trust protections apply (provided the trust is not tainted) which broadly result in income and gains of the trust not being assessed to income and capital gains tax in the hands of the settlor unless they receive distributions from the trust. Per the Spring Budget 2024 announcement these protections are to be removed, meaning that income and gains of settlor-interested trusts are potentially deemed to arise in the hands of a UK resident settlor (subject to the new 4-year exemption for foreign income and gains).
• The non-UK situs assets of the trust are considered to be excluded property for UK inheritance tax purposes and therefore not within the scope of UK inheritance tax. Per the Spring Budget 2024 announcement the Conservative Government’s intention is for such pre-6 April 2025 ‘excluded property’ trusts to retain their protection from inheritance tax, however Labour’s stance appears to be that pre-6 April 2025 offshore trusts will not retain their UK inheritance tax protection should they succeed at the next general election.

It remains to be seen then whether 6 April 2025 will result in offshore ‘excluded property’ trusts losing some of the key elements which make them effective for UK tax purposes.

How can you prepare for 6 April 2025?

The 2024 Spring Budget and Labour’s subsequent reported stance, along with the short timeframe in which these changes are proposed, leaves non-UK domiciled individuals in an uncertain position. However, what is clear is that while we await draft legislation, non-UK domiciled individuals.

• Should consider how the new regime will impact them and whether any steps are required pre-6 April 2025 to manage their UK tax exposure, and
• In particular, those who are long-term UK resident and/or who have offshore trust structures, will need to consider whether their affairs are structured in a way that continues to be UK tax effective.

ARE CHANGES COMING WITH THE 4TH JULY ELECTION?

The 4^th July election announcement, has unfortunately led to even more uncertainty for UK resident, non-domiciled individuals.

Given both major parties are committed to amending the tax position for non doms,  we are fairly certain that the tax landscape for non doms will still change. The exact tax policy and timing is now however, even more unclear.

The position so far, is as follows:

• Draft legislation associated with Conservative Spring budget announcements was expected during the summer. Parliament is now dissolved, meaning no legislative progress will be announced before the election has taken place. HMRC have also halted consultation sessions with the tax profession.
• Inheritance tax changes, which were to be subject to consultation with stakeholders before any draft legislation, have now been paused. As consultations have not yet been started, it is unlikely that any draft legislation could be presented until very late this year, at the earliest.

Both Conservative and Labour policies rely on spending plans associated with expected tax generated by the abolishment of non dom tax regime and so it’s likely a question of when, not if, any draft legislation is going to be presented to parliament. Knowing both major parties need this tax revenue, It’s possible that civil servants are still working on proposed legislation behind the scenes, which means it is perhaps unwise to assume that non dom reform will be significantly delayed.

Key to mitigating future UK tax exposure, will be the ability to act quickly once legislation is clear and so we still recommend that affected individuals start planning early for the changes which may come, setting out potential plans and realistic options now. This will in turn,  allow for a swift and agile response once the political and legislative landscape is clear.

Our Private Client International Tax team have significant experience in this area of UK tax law and are perfectly placed to help with any UK residence or non-dom aspects including inheritance tax and the impact for offshore trust structures. If you have any queries about the changes brought by the 2024 Spring Budget and the changes to non-dom tax status please do not hesitate to get in touch with Lynn Gracie, Gunhild Dam, Joel Nuttall, or your usual AAB contact.