Globally Speaking | March 18, 2024

Non-dom analysis: UK leavers

I am UK resident but non-UK domiciled (“RND″) and have been in the UK for longer than ten years. Should I stay or should I go?

Income and capital gains

RNDs who have been resident in the UK longer than four tax years as at 6 April 2025 (“affected RNDs″) will not qualify for the proposed new four-year exemption regime (“four-year FIG regime″) for foreign income and gains (“FIGs″). This means they will be exposed to UK tax on their FIGs as they arise, subject to transitional rules. The remittance basis of taxation which hitherto they would have been eligible to claim for up to fifteen years, will no longer be available to them.

The transitional rules for affected RNDs are set out in our separate “Non-dom analysis: four years onwards″, but they bear repetition briefly here also. They are as follows:

  • taxation on 50% of affected RNDs’ foreign income arising in tax year 2025/26;
  • option to rebase assets to their 5 April 2019 value for disposals by affected RNDs after 5 April 2025; and
  • a Temporary Repatriation Facility for FIGs remitted by affected RNDs in tax years 2025/26 or 2026/27 only, resulting in taxation at a benign 12% rate of tax. 

Inheritance tax (“IHT”)

Under current proposals (which remain subject to consultation), RNDs who have been resident in the UK for ten years will be subject to IHT on the value of their worldwide assets. Such exposure will continue for a further ten years, after they cease to be UK resident.

This is to be contrasted with the current regime, under which IHT only applies to their UK-situs assets or indirect interests in UK residential property (including “relevant loans” in connection with such), unless and until the individual acquires a UK “domicile of choice” or has been resident in the UK for fifteen of the previous twenty tax years.

Subject to exemptions and reliefs, IHT applies on assets gifted during lifetime in the seven years preceding death or into trust, including reservation property in trusts, as well as assets held beneficially at death. With the main rate of IHT at 40%, an IHT charge on worldwide assets at death will not be insignificant.

Trust assets

If an affected RND has set up trusts for their foreign assets (“excluded property trusts″), provided they have done so before 6 April 2025 and there are no additions to the trust fund after that date, under current proposals, the trust assets will continue to be outside the scope of IHT after that date, to the extent that they remain situated overseas and do not include indirect interests in UK residential property. This means that the value of the settled assets will not be part of the settlor’s estate on their death, nor subject to IHT charges in the trust on ten-yearly anniversaries or exit.

A pre-6 April 2025 excluded property trust is therefore an attractive IHT planning tool for affected RNDs who intend to remain in the UK for the long term.

Such trusts will, with effect from 6 April 2025, be looked through for UK income tax and capital gains tax purposes to the extent of any new FIGs arising after this date, where the trust is an offshore settlor-interested trust and the settlor is an affected RND. This is the effect of the proposed abolition of the protections introduced in April 2017, which ensure that FIGs are currently only taxed in the hands of a UK resident beneficiary (including a settlor-beneficiary) upon receipt of benefits from the trust. While FIGs that arose within the trust structure before 6 April 2025 will only be subject to UK tax on UK residents if they are “matched” to trust distributions or benefits received by them, an affected RND will suffer UK tax on these matched FIGs without the benefit of the remittance basis.

Planning options

The extent to which the above tax consequences will impact affected RNDs will differ from person to person. For some, the risk of having their worldwide estate subject to IHT at 40% while UK resident and for a ten-year period after that, will be the most significant; for others, who enjoy high levels of FIGs, the new regime for worldwide taxation will be costly, especially as their exposure to UK income tax and capital gains tax will typically not be mitigated by appropriate structuring.

So, should I stay or should they go?

Option 1: Leave the UK

If an affected RND considers this the best option, they should ideally plan to leave before 6 April 2025.

This generally means taking up residence in another jurisdiction and being able to evidence their non-UK residence status as a matter of the UK’s Statutory Residence Test satisfactorily to HM Revenue and Customs (for further information on the Statutory Residence Test, please click here). Tax advice should be obtained in each of the UK and their chosen new jurisdiction.

If successful in ceasing to be UK tax resident, there will be no UK tax due on their FIGs (other than UK-property related FIGs) for the duration of their time outside of the UK, provided they are not regarded as temporary non-residents only who resume their UK residence (on current rules) within five years. Individuals in this position would ideally need to remain non-UK resident for at least ten tax years given the new IHT proposals.

At present, the IHT position for leavers is not clear.

The government’s technical paper published on Spring Budget day proposes that there will be a ten-year tail for IHT, such that once an RND is within scope of IHT, they will remain so for a further ten years after ceasing to be UK resident. If an affected RND leaves the UK after 6 April 2025, this ten-year IHT tail will apply. It would seem harsh for it to apply if the RND leaves the UK before 6 April 2025, but until we have seen the government’s consultation document and enacting legislation has been passed, it is difficult to know for certain. To be safe, affected RNDs considering leaving the UK should aim to do so before 6 April 2025, if IHT is an important factor.

If the affected RND plans to return to the UK at some point in the future, it would be advisable for them to set up an excluded property trust for their non-UK assets before 6 April 2025, to ensure ongoing protection from IHT. While there may be scope for excluded property trusts to be created prior to a return to the UK after 5 April 2025, on the basis that this avoids an IHT entry charge at 20%, such trusts will be exposed to IHT ten-yearly anniversary and exit charges during any period of UK residence for the settlor.

Option 2: Stay in the UK

Affected RNDs who choose to stay in the UK will be subject to UK tax on their FIGs from 6 April 2025 onwards (subject to the transitional rules), and will have their worldwide estates exposed to IHT. The planning options available to such individuals are set out in our separate “Non-dom analysis: year four onwards″.

Some affected RNDs who are minded to leave the UK may opt to stay until the transitional rules expire where current year FIG generation is not significant or can be deferred, particularly if IHT implications can be tolerated (noting, however, that they will be within scope of the ten-year IHT tail discussed above).

There will be a lot for this category of RND to consider before 6 April 2025 but with over a year to go, they do have some time to put planning in place, provided advice is taken at an early stage.