In this “stop press” edition of our Globally Speaking e-bulletin, we provide an update on how the publication of the new Government’s policy paper on 29 July 2024 provides clarity on the proposed reform of the UK’s non-domiciled (non-dom) regime, and what remains unknown.
What’s new?
On Monday 29 July 2024 the Government published a summary policy paper on “Changes to the taxation of non-UK domiciled individuals“. This confirms that the core policy framework remains as proposed by the previous Government in the Spring Budget, subject to certain material differences. Those differences are consistent with Labour’s April 2024 press release and party manifesto and, as such, there are few surprises.
The paper gives taxpayers and their advisors a degree of certainty but it is light on detail, much of which has been reserved to the Government’s Autumn Budget – now set for 30 October 2024 – and the draft legislation to follow (hopefully shortly) thereafter.
What is the Government’s policy and how have the non-dom reform proposals changed?
We summarise in the table below the Government’s policy and the changes this introduces to the Conservatives’ Spring Budget proposals.
| Policy summary | Changes to the reforms announced in the Spring Budget | Our thoughts | |
|---|---|---|---|
| Objectives | The Government’s stated objectives are: 1) to address unfairness in the tax system, so that everyone who is long-term resident in the UK pays their taxes here; 2) to put in place reforms that are “internationally competitive” and “focused on attracting the best talent and investment to the UK“; and 3) to end advantages for existing non-doms left open by the previous Government’s proposals. | – | The question remains as to how the Government will balance the competing objectives of fairness and competitiveness, particularly when the 4 year foreign income and gains (FIG) regime is compared to inpatriate regimes available in other jurisdictions. |
| Individuals | |||
| Income Tax (IT) & Capital Gains Tax (CGT) | From 6 April 2025, the remittance basis of taxation will end. A new residence-based exemption regime will be introduced, providing 100% relief on FIG for new arrivals in their first 4 years of UK tax residence, provided they have not been tax resident in any of the 10 consecutive years prior to their arrival (4 year FIG regime). For individuals who have been taxed on the remittance basis: 1) any FIG that arose before 6 April 2025 will continue to be taxed when remitted to the UK (as is the case under the current rules); 2) there will be an opportunity to rebase foreign assets disposed of after 5 April 2025. The Government is considering the appropriate rebasing date and will set this out in the Autumn Budget; 3) they will have the benefit of a Temporary Repatriation Facility (TRF) to enable unremitted FIG that arose before 6 April 2025 (potentially including stockpiled income and gains within overseas structures) to be remitted to the UK and taxed at a reduced rate for a limited time. The rate of tax and length of time for which the TRF will be available will be confirmed in the Autumn Budget. A form of Overseas Workday Relief will be retained, with details to be confirmed in the Autumn Budget. | The previously announced transitional relief providing a 50% reduction in foreign income subject to tax for individuals losing access to the remittance basis in the first year of the new regime will no longer be introduced. 5 April 2019 is no longer the confirmed date for the rebasing relief. The 12% rate and 2 year duration for the TRF have not been confirmed and the terms of the TRF remain under review. | It is disappointing that details of the rebasing relief and the rate and duration of the TRF have not yet been confirmed, as it leaves non-doms who wish to remain in the UK with a short window for planning. |
| Inheritance Tax (IHT) | From 6 April 2025, the current domicile-based IHT system will be replaced by a new residence-based one. It is envisaged that an individual’s worldwide assets will be brought within the scope of IHT once an individual has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with provision to keep individuals in scope for 10 years after they leave the UK. IHT charges arising on deaths (and we presume, although it is not expressly stated, other chargeable events) occurring before 6 April 2025 will be unaffected by these changes and will be charged under existing rules. | The previously announced formal consultation on IHT reforms will not go ahead. Instead, the Government will engage in “listening sessions” with stakeholders and advisers this month. Interestingly, there is no mention of the new residence-based IHT test taking into account other “connecting factors”, although the paper does not expressly rule this out. In the absence of taking other connecting factors into account, an IHT test based solely on residence potentially puts British expats who have been outside the UK for more than 10 years in a better position than under existing rules. | While the reforms will abolish the concept of domicile for domestic tax purposes, consideration will need to be given to the impact this will have on the UK’s inheritance and estate tax treaties with other jurisdictions which cannot be amended unilaterally. There is no indication in the policy paper as to how the Government proposes to address this. |
| Trusts | |||
| IT & CGT | From 6 April 2025, the protection from UK tax for settlors/transferors on FIG arising within offshore trust structures until a benefit has been received will no longer be available unless: 1) the trust is settlor-excluded and there are no relevant loan arrangements; 2) the settlor qualifies for the 4-year FIG regime; or 3) the structure can benefit from the IT motive defence. | – | – |
| IHT | From 6 April 2025, excluded property trusts will no longer offer a shelter from IHT. The Government recognises that trusts will already have been established and structured to reflect the current rules and 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 in the Autumn Budget. | Existing trusts established prior to 6 April 2025 will not retain their IHT protection. | While full “grandfathering” is unlikely to be available, it is positive that there might be some transitional arrangements for existing trusts. Delaying existing trusts’ exposure to IHT or an adjustment to keep such trusts outside the scope of the gift with reservation of benefit rules to prevent double exposure to IHT would be welcomed by clients, but we will not have details of the adjustments that the Government has in mind until the Autumn Budget. It is possible that any transitional measures will be fairly limited, perhaps allowing for the winding up of pre-existing trust structures within a specified period of time without penal IHT consequences. |
| Further changes | |||
| Review of anti-avoidance codes | The Government intends to conduct a review of offshore anti-avoidance legislation, including the transfer of assets abroad and settlements codes legislation, to modernise the rules and ensure they are fit for purpose with a view to introducing any changes from the beginning of the 2026/27 tax year at the earliest. | Given the complexity of the existing rules, this newly announced area of reform is welcome, particularly if it achieves greater certainty about the application of the rules and availability of the motive defence. However, the prospect of future reforms being introduced potentially within a year of the aforementioned changes to the treatment of offshore trusts creates yet more uncertainty for clients and advisors. | |
Further reading
Our earlier commentary on the proposed changes to the non-dom regime can be found here.