Non-dom tax status abolished – but this softens the blow

Updated: 3^rd June

For someone who has been working in tax for several years, non-domicile tax status and the UK tax breaks this provides has always been a controversial tax policy, no matter what government has been in power and no matter how well the UK economy has performed.

It was originally introduced by William Pitt in 1799, to eliminate UK wartime taxes for those with foreign property, very much at a time when many resided in overseas colonies. Whilst there may have been justification for this tax policy at that time, many have suggested this no longer holds any place in modern Britain. Perhaps because he simply had no choice in terms of exploring new ways to generate additional tax revenue for the UK, or maybe because he knew a Labour election victory would inevitably lead to this, Jeremy Hunt used the 2024 Spring budget to announce the abolishment of non-dom tax status, effective from 6 April 2025. This closes the window (and perhaps some of the controversy), on a tax scheme that lasted over 225 years.

As a reminder, ‘non-dom’ tax status essentially allows qualifying individuals a legislative method of sheltering overseas income, gains and assets from UK taxes for up to 15 years of tax residence. Yes, there is an annual tax charge of £30,000 after 7 years of tax residence, rising to £60,000 after 12 years, but for many wealthy non-doms, this still represented significant UK tax savings compared to paying tax on all overseas income and gains arising in each tax year.

Are changes coming with the 4^th July election?

Our previous article connected to the Conservative government’s 2024 Spring budget outlined the proposed changes for non-doms and new residents in the UK.

This article highlighted existing questions around timing of implementation and in particular the lack of clarity related to Inheritance Tax changes.

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.

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Changes to the non-dom regime

The current non-dom tax regime allows individuals to choose either the remittance basis of assessment (ringfencing tax due on overseas sources actually remitted, or paid to the UK) or the arising basis, where in accordance with all UK domiciled individuals, you are then taxed on sources as they arise, irrespective of being paid into the UK.

Jeremy Hunt has now confirmed that non-dom tax status is abolished with effect from 6 April 2025. This will remove the ability to claim the remittance basis of assessment and non-doms must now pay tax on their worldwide income.

Transitional Relief

Given the significant impact on those involved, the government have confirmed transitional arrangements for existing non-doms:

• A temporary 50% reduction in the personal foreign income subject to tax in 2025/26 for those non-doms who will lose access to the remittance basis on 6 April 2025. This 50% reduction will not apply to overseas gains.
• For those who have claimed remittance basis, gains on overseas assets will be subject to UK capital gains tax in full, however they will be allowed to re-base capital assets held @ 5 April 2019, i.e. allowing substitution of the value at this date as the base cost, instead of original cost. This should help mitigate future capital gains tax liabilities assuming the asset in question will have a higher value @ April 2019, compared to cost.
• There will be a new Temporary Repatriation Facility (TRF) – essentially allowing remittances of foreign income and gains that arose before 6 April 2025, to be remitted to the UK in the two years 2025/26 and 2026/27. A reduced tax rate of 12% will be applied to these remittances, which could represent a significant tax reduction compared to current UK tax rates. There will be some relaxation of the complex rules ‘mixed funds’ ordering rules to make it easier to take advantage of the TRF.

New Arrivals in the UK – New 4 Year Tax Relief

For those arriving in the UK who have previously been non UK resident for 10 consecutive years, there is a new, regime available for all new foreign income and gains (FIG). It allows FIG sources that arise after 6th April 2025, to be brought to the UK without any additional tax charge for the first four years.

Existing UK residents, who have been resident for fewer than four tax years and are eligible for this scheme, will also benefit from the relief until the end of the 4^th year of residence.

This would appear to provide a far simpler and attractive scheme, which may in turn, encourage many High Net Worth individuals with overseas assets/income to consider relocating to the UK, at least for four years, without having to pay tax on their worldwide income.

What about Inheritance Tax ?

Domicile status dictates your liability to UK Inheritance Tax (IHT) and so it follows that abolishing non-dom tax status, will very much impact the potential exposure to UK IHT. The Government have recognised this and intend to consult on the best way forward, likely moving towards a tax residence-based regime.

Note however, that to provide some certainty to those affected, it has been confirmed that the current tax position connected to non UK assets settled into a trust by a non-dom before 6th April 2025 will not change, i.e. these assets will remain outside the scope of the UK IHT regime.

What does this mean for you?

If you are affected by the change in tax law for non-doms, it is important that you are firstly aware of the changes and potential UK tax impact and secondly you take advantage of any transitional reliefs available to mitigate your UK tax exposure. Non-dom tax status and the remittance basis are notoriously complex and needs careful management to ensure reporting is both correct and tax efficient.

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. Please do not hesitate to get in touch with Lynn Gracie, Gunhild Dam, or your usual AAB contact if you would like to discuss how we can help.