Posted: 07/03/2024
The Chancellor of the Exchequer, Jeremy Hunt, delivered his Spring Budget on 6 March 2024.
The most dramatic announcement of the Spring Budget was the abolition of non-domiciled (‘non-dom’) status from 6 April 2025.
Broadly speaking, a non-dom is an individual whose permanent home, or domicile, is outside the UK. The current UK tax regime is favourable for individuals who are tax resident in the UK but are non-UK domiciled. Existing rules allow non-doms to use the remittance basis of taxation. A remittance basis user pays tax on their UK income and gains, but their foreign income and gains (FIG) are not subject to UK tax unless they are remitted to the UK.
Under the proposals, the remittance basis of taxation will be abolished, and a new residence-based regime (the four-year FIG regime) will be introduced, with effect from 6 April 2025.
To be eligible for the four-year FIG regime, the individual must have been non-UK resident for a period of 10 years. Under the four-year FIG regime, where a claim is made, eligible individuals will not pay UK income tax or capital gains tax on any FIG that arise in their first four years of UK residence. UK income and gains will be taxed during that period in the usual way. Any FIG arising during this four year period can be brought to the UK without a tax charge.
An individual who chooses to be taxed under the four-year FIG regime will lose their personal allowances for income tax and capital gains tax.
Residence will be determined under the Statutory Residence Test (which has applied since 6 April 2013), and treaty residence or non-residence will be ignored.
The government also intends to introduce a new ‘Overseas Workday Relief’ (OWR). Broadly, under current rules, OWR provides the benefit of the remittance basis to a UK resident non-dom in respect of their foreign employment earnings for a period of up to three years. The new OWR will provide relief on foreign employment earnings for the first three years of UK residence, and the relief will apply whether or not those earnings are remitted to the UK.
While the government believes this will simplify the existing non-dom regime and encourage non-doms to bring their FIG into the UK, such decisions will very much depend on an individual’s personal circumstances.
After four years of UK residence, the four-year FIG regime will cease to apply, and the individual will pay UK income tax and capital gains tax on their worldwide income and gains. This means that any FIG that arise in the individual’s fifth year of UK residence, and any years of UK residence thereafter, will be within the scope of UK tax (subject to any double tax treaty reliefs). This will be subject to transitional arrangements for existing UK residents (see below) who do not qualify for the four-year FIG regime.
From 6 April 2025, if an individual has been UK tax resident for less than four years (after 10 years of non-UK tax residence), they will be able to use this new regime for any tax year of UK residence in the remainder of those four years. An individual who became UK tax resident in the 2022/23 tax year would be able to use the four-year FIG regime in the 2025/26 tax year. In any subsequent tax years of UK residence, they would be taxed on the arising basis.
Taxpayers may benefit from a series of measures to soften the transition from the remittance basis to the arising basis, and to encourage them to bring funds to the UK:
The government will consult on IHT changes. Under the existing regime, no IHT applies to non-UK situated assets held by a non-dom individual (save for certain foreign assets that derive their value from UK residential property, for example non-UK companies that hold UK residential property).
Such individuals are only subject to IHT on their UK situated assets. Once an individual has been UK resident for 15 out of 20 years, they are deemed domiciled in the UK for tax purposes, and their worldwide assets are within the scope of IHT, subject to any double tax treaty relief or exemptions that might apply. Current rules usually apply a four year ‘tail’ to departing deemed-domiciled individuals for IHT purposes.
The proposals announced as part of the budget would be another significant departure from the current rules. The government’s proposal is that from 6 April 2025, it intends to move inheritance tax from a domicile-based regime to a residence-based regime. The suggestion is that if an individual has been resident in the UK for 10 tax years, then their worldwide estate will become subject to IHT.
A ‘10-year tail’ is proposed, so that even if an individual has left the UK, they will still be within the UK IHT regime for a period of 10 years. There is a suggestion that criteria such as connecting factors to the UK, in addition to 10 years of residence, will also be relevant. We will provide a further update once the consultation paper is published.
Income and gains
Under the existing rules, non-UK resident trusts settled by an individual who was non-UK domiciled, and not deemed domiciled, benefit from so-called ‘protected trust’ status. The broad effect of protected trust status is that notwithstanding that the settlor can benefit from the trust, any FIG that arise within the trust structure are not attributed to, and so not taxed on, the settlor.
Under the government’s proposals, these trust protections will cease to apply. This means that any FIG that arise within settlor-interested trusts after 6 April 2025 will be taxable on a UK resident settlor on the arising basis, unless the four-year FIG regime applies to the individual. Any FIG that arise in a protected non-resident trust before 6 April 2025 will not be taxed unless distributions or benefits are paid to beneficiaries who have been resident in the UK for more than four years. It is not yet clear how the matching rules will apply to distributions made during that period.
Beneficiaries and settlors who are within the four-year FIG regime will be able to receive benefits from 6 April 2025 without a UK tax charge, whether or not the benefits are received in the UK. However, such benefits are not matched to trust income and gains and will be subject to a modified onward gift rule.
Inheritance tax
The government has confirmed that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to 6 April 2025 will not change, so these trusts are excluded from the scope of the proposed new IHT regime. The government has also said that the interaction between the gift with reservation provisions and excluded property trust rules will also remain, meaning excluded property will not be brought into charge on the settlor’s death, even if the settlor retains a benefit in the trust asset.
There remains a significant benefit to creating a non-resident trust prior to 6 April 2025 in some cases in order to secure the current IHT benefit, albeit where the trust remains settlor interested, there will be no benefit from an income tax or capital gains tax perspective.
New trusts or additions to existing trusts made by a non-UK domiciled individual on or after 6 April 2025 will be subject to new residence-based rules. The government has suggested that whether such a trust is within the scope of IHT in those circumstances will depend on whether the settlor meets the residence criteria (eg ten years of UK residence) or is within the tail provisions at the time assets are added to the trust and/or when charges, such as ten year anniversary and exit charges, arise.
The next year will be crucial for non-doms, who potentially have 12 months to plan for the changes. With a general election expected at some point this year, it is difficult to anticipate when the legislation will pass through Parliament and at what point in the year non-doms will have certainty.
The Labour Party also intends to change the existing non-dom regime. It is possible that, if successful at the next election, it could continue with the new regime as announced by the government, alter the existing proposals, or even introduce an entirely new regime.
During the next year, individuals should work with their advisers to understand their future UK tax liability under the new regime, and whether they may benefit from the new four-year FIG regime and any of the transitional reliefs.
In addition, those concerned with IHT should take advice on the creation of a trust to take advantage of the current IHT protection, which should also continue after the introduction of these rules.
With significant changes proposed for non-domiciled individuals who wish to move to the UK or who are already living here, we would encourage such individuals to take early advice to plan their affairs appropriately. If you have any questions or concerns about the impact of the Spring Budget on your affairs, please let us know and we would be happy to assist.
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