Globally Speaking | March 18, 2024

Non-dom analysis: year four onwards

I have been UK resident for longer than four years, and am claiming the remittance basis. What should I be thinking about?

In his Spring Budget of 6 March 2024, the Chancellor announced material changes to the treatment of UK resident, non-domiciled individuals (“non-doms“). The category of non-doms most immediately affected are those who will have been UK resident in at least four UK tax years as at 6 April 2025, i.e. for whom tax year 2025/26 will be their fifth or more of UK residence (“affected RNDs“).

It should be appreciated that the proposed measures are subject to legislation and, in the case of UK inheritance tax (“IHT“), consultation. There is also an element of uncertainty arising from the electoral cycle, with a general election and new (potentially Labour) government both being factors that will affect the final shape of the legislation.

The current position

Non-doms are currently able to protect their foreign income and gains (“FIGs“) from UK taxation by claiming the remittance basis of taxation in relevant tax years. This beneficial treatment is free of charge in the first seven years and therefore widely claimed, including to be able to access a wider range of investments abroad without having to factor in UK tax considerations (for example, in relation to non-reporting funds, the disposal of interests in such is taxed in the UK at income tax rates of up to 45%, rather than capital gains tax at 20%).

For non-doms who have been in the UK for more than seven years, accessing the remittance basis of taxation is subject to an annual remittance basis charge of £30,000 or £60,000 depending on length of residence. This means that non-doms in this position typically carry out a mathematical exercise each year, to determine whether having their FIGs taxed on the arising basis or claiming the remittance basis and paying the remittance basis charge produces a more beneficial outcome. Some would simply pay the remittance basis charge in order to simplify their reporting in the UK and not have to go through a full self-assessment exercise in respect of their worldwide income and gains.

Following the changes in April 2017, the remittance basis of taxation is no longer available after fifteen years of UK residence, at which point non-doms become deemed domiciled in the UK for all UK tax purposes if they continue to reside in the UK.

The non-dom system has been attractive in providing international individuals and their families with a medium-term option for basing their residence in, including to educate children, be involved with start-up businesses and treating the UK as a platform for their international lifestyle.

What is about to change?

The Chancellor has announced that the current remittance rules for non-doms will cease to apply (along with the concept of “domicile” for UK tax purposes) from 6 April 2025. In their place, there will be a new four-year residence-based tax regime (“four-year FIG regime“) for FIGs arising to qualifying individuals, including by attribution in respect of their connected offshore structures.

The final year to claim the remittance basis for non-doms who are not yet deemed domiciled in the UK will therefore be tax year 2024/25.

Beyond 5 April 2025, affected RNDs who stay in the UK will:

  1. not be able to benefit from the four-year FIG regime. A ten-year period of non-UK residence will be required if they were to take advantage of the four-year FIG regime as a new arrival at any time in the future.
  2. pay UK tax on their worldwide income and gains on the arising basis, irrespective of their domicile. Such individuals’ UK income and gains will already be subject to UK tax on the arising basis, but this is a significant change in relation to their FIGs.

Worldwide taxation on the arising basis will apply to FIGs:

  • arising to affected RNDs directly;
  • generated by non-UK companies, to the extent they can be attributed to affected RNDs (as shareholders and/or loan creditors) under anti-avoidance legislation. In relation to gains, this only applies to closely held companies, albeit many family businesses and owner-managed companies will be such;
  • FIGs arising in trust structures that are attributed to affected RNDs as settlors, typically where trusts are settlor-interested or there are relevant loan arrangements; and/or
  • FIGs in trust structures that are matched to distributions or other benefits received by affected RNDs as trust beneficiaries.

The UK tax exposure of affected RNDs in relation to new FIGs will depend on individual circumstances, and it is important that these be reviewed sooner, rather than later. In particular, consideration should be given to the availability of:

  • applicable defences where, corporate structures in particular, have been established for commercial reasons or, in the case of both trusts and companies, long before UK residence commenced for reasons unrelated to UK taxation. Where such defences are available, the effect may be to switch off the attribution of FIGs to affected RNDs; and/or
  • double taxation treaty relief, where FIGs arise in treaty partner jurisdictions for the UK.

Are there any transitional rules?

There are transitional provisions to ease the introduction of what many will see as draconian tax changes. They are as follows.

  1. For the tax year 2025/26 only, 50% of affected RNDs’ foreign income will be subject to UK tax, provided they have claimed the remittance basis previously. From 6 April 2026 onwards, taxation will be on all of the affected RNDs worldwide income at their marginal rate of UK income tax (up to 45% currently).
  2. From 5 April 2025, affected RNDs’ worldwide gains will be taxed at standard rates of  UK capital gains tax (up to 20% or in the case of property-related and carried interest gains 28%, with the rate reducing to 24% for property-related gains from 6 April 2024). Where affected RNDs dispose of an asset post-5 April 2025, which was held by them personally on 5 April 2019, they will have the option to rebase the asset to its market value as at 5 April 2019. 5 April 2019 rebasing also applies to disposals of interests in property-rich companies.
  3. There will be a “Temporary Repatriation Facility” (“TRF“) between 6 April 2025 and 5 April 2027, enabling non-doms to remit pre-5 April 2025 FIGs that have previously benefited from the remittance basis, at a reduced rate of UK tax of 12%. On current proposals, it is unclear whether this TRF will extend to FIGs arising in trust structures of which affected RNDs are settlors or that can be taxed on matching principles on affected RND beneficiaries receiving trust distributions or other benefits. To facilitate this “repatriation”, where affected RNDs have a pot of non-clean capital, the mixed fund rules (which treat such funds as being remitted to the UK in a specific order) will be relaxed.

Is IHT changing for non-doms?

Yes. The Spring Budget contained an announcement indicating that the government will consult on reforming IHT from a domicile-based system to a residence-based criteria, potentially alongside other connecting factors. An accompanying technical paper suggests that IHT on worldwide assets will only apply for affected RNDs after they have been UK resident for ten years. Once they are within the scope of IHT, however, they will continue to be so for a further ten years after ceasing to be UK resident (“ten-year IHT tail“).

This is a harsh rule for leavers, which may prove to be a crystallisation event for those approaching ten years of UK residence, prompting them to leave before they are brought within the scope of IHT.

On a positive note, so called “excluded property trusts” created by non-doms to shelter their non-UK assets from IHT, will continue to afford protection under the new IHT rules, provided they were created before 6 April 2025 and no settled property is added to them after that point.

What can I do to prepare for these changes?

Those who wish to stay in the UK for any length of time after 5 April 2025 should consider taking steps to mitigate the impact of the proposed tax changes now. The options available will be dependent upon personal circumstances, but may include some of the below.

Income tax and capital gains tax

1. Taking advantage of the transitional reliefs, including by:

    • realising FIGs in 2024/25 with the benefit of the remittance basis;
    • rebasing of non-UK assets, where this would produce a more beneficial outcome than the April 2019 rebasing election; and
    • taking advantage of the TRF.

2. For those staying in the UK for a limited period after 5 April 2025 and wishing to ensure they have sufficient clean capital to last them through it, making use of Business Investment Relief when investing in qualifying investments in the UK.

3. Adopting an investment strategy that favours capital growth over income generation, especially after 5 April 2026, when the transitional relief on 50% of relevant RNDs’ foreign income will end.

4. Making use of products and structures that achieve UK tax deferral, such as:

    • offshore bonds, whereby tax-free withdrawals of capital of up to 5% of the initial premium are allowed each year. Bonds can be especially attractive where affected RNDs are likely to be non-UK resident in due course and certainly by the time a chargeable event occurs (e.g. when the bond matures or is surrendered); and
    • interests in non-reporting offshore funds, which do not distribute their income albeit at the cost of realising offshore income gains on disposing of interests in such funds at a time when they are still UK resident.

5. Reviewing trust and corporate structures, to assess the impact of the proposed changes, including in relation to the availability of the motive defence and/or double tax treaty relief.

6. Making use of alternatives to trusts, such as Family Investment Companies and Open-Ended Investment Companies in appropriate circumstances (also depending on the underlying investments) to increase the after-tax efficiency of long-term returns.

IHT

7. Creating an excluded property trust before 6 April 2025. Although the trust will be looked through for UK income tax and capital gains tax purposes, the current protections from IHT will be grandfathered (subject to the detail of the new IHT rules). To take advantage of this opportunity, timing will be of the essence.

This is a generic overview only of how the proposed changes, if enacted in their current form, may impact affected RNDs. Tailored advice to suit clients’ individual circumstances should be obtained. Although the proposed reforms remain subject to change until enacted, early advice is essential. We would be pleased to assist with this, if desired.