I have been UK resident for longer than four years, and am claiming the remittance basis. What should I be thinking about?
In her Autumn Budget of 30 October 2024, the Chancellor confirmed that the government will be proceeding with the previously announced 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 non-doms“).
The proposed measures are contained in the Finance Bill 2025, which recently had its second reading in Parliament. Having said this, the non-dom provisions are one of the parts of the Finance Bill 2025 that have been committed to a Public Bill Committee. The conclusions of that Committee will not be made available until 4 February 2025.
The current position
Non-doms are currently able to protect their foreign income and gains (“FIG“) 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, and includes being 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% until 29 October 2024 and at 24% on or after 30 October 2024).
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 FIG 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 non-dom changes introduced 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 confirmed 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, as anticipated, there will be a new four-year residence-based tax regime (“four-year FIG regime“) for FIG 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 non-doms who stay in the UK will:
- not be able to benefit from the four-year FIG regime. A ten-year period of consecutive 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; and
- 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 FIG.
Worldwide taxation on the arising basis will apply to FIG:
- arising to affected non-doms directly;
- generated by non-UK companies, to the extent they can be attributed to affected non-doms (as shareholders and/or loan creditors) under the UK’s 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;
- FIG arising in trust structures that are attributed to affected non-doms as settlors, typically where trusts are settlor-interested or there are relevant loan arrangements; and/or
- FIG in trust structures that are matched to distributions or other benefits received by affected non-doms as trust beneficiaries.
The UK tax exposure of affected non-doms in relation to new FIG will depend on individual circumstances, and it is important that these be reviewed as soon as possible. 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 FIG to affected non-doms; and/or
- double taxation treaty relief, where FIG 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. The Labour government has put their stamp on some of the transitional rules that had been originally proposed by the previous Conservative government in their Spring Budget.
The transitional rules, announced in the Autumn Budget, are as follows.
- From 6 April 2025, affected non-doms’ worldwide gains will be taxed at standard rates of UK capital gains tax (up to 24% or, in the case of carried interest gains, 32% in 2025/26). Where affected non-doms, who were not deemed UK domiciled at any time before the tax year 2025/26, dispose of an asset post-5 April 2025, which was held by them personally on 5 April 2017, they will have the option to rebase the asset to its market value as at 5 April 2017 if they claimed the remittance basis for at least one year between 2017/18 and 2024/25. The asset must have been non-UK situated between 6 March 2024 and 5 April 2025.
- There will be a “Temporary Repatriation Facility” (“TRF“) between 6 April 2025 and 5 April 2028, enabling non-doms to remit pre-6 April 2025 FIG that have previously benefited from the remittance basis, at a reduced rate of UK tax of 12% from 6 April 2025 to 5 April 2027, and 15% from 6 April 2027 to 5 April 2028. This TRF will also extend to FIG arising in trust structures before 6 April 2025 which have been matched to capital payments or other benefits received by UK resident beneficiaries (including settlor-beneficiaries) from the trust within the three-year TRF period, where the recipient individual was a remittance basis user in at least one tax year. To facilitate this “repatriation”, where affected non-doms 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.
The former Conservative government had originally proposed that affected non-doms’ foreign income be subject to a 50% reduction for UK tax purposes for the tax year 2025/26 only, provided they had claimed the remittance basis previously. However, the Labour government will not be introducing this particular transitional provision and they had made their position on this clear in a July policy statement. This means that, from 6 April 2025 onwards, taxation will be on all of the affected non-doms’ worldwide income at their marginal rate of UK income tax (up to 45% currently).
Is inheritance tax (“IHT”) changing for non-doms?
Yes. The Autumn Budget included the announcement that the government will reform IHT from a domicile-based system to a residence-based system. IHT on worldwide assets will only apply for affected non-doms after they have been UK resident for at least ten of the last twenty tax years immediately preceding the tax year in which the chargeable event occurs (“long term resident” in the UK or “LTR“). Once they are within the scope of IHT, however, they will continue to be so after ceasing to be UK resident for a period of between three and ten tax years (“IHT tail“). The length of the IHT tail will depend on the number of tax years the individual has been resident in the UK prior to their departure.
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.
The indefinite IHT protection currently afforded to so called “excluded property trusts” created by non-doms to which no further assets are added after a change of the settlor’s (actual or deemed) domicile to UK, will cease with effect from 6 April 2025 where the settlor becomes, and for as long as they remain, an LTR. Where that is the case, the trust’s IHT treatment – as “excluded property” outside the charge to IHT or “relevant property” within the scope of IHT – will follow the status of the settlor as LTR or otherwise. In addition to ten-yearly anniversary and exit charges within the trust (at up to 6%), under the relevant property regime, subject to a limited concession for excluded property trusts that were created and funded pre-30 October 2024, the value of trust assets will also be includible in the settlor’s estate where the trust is settlor-interested. This is a very significant change, which will require monitoring of the settlor’s status by trustees, as well as planning for the trust’s tax-induced liquidity requirements. For more information regarding the taxation of trusts created by non-doms after 5 April 2025, please see the article “Non-dom reforms – let’s talk about trusts“.
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 FIG 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 2017 rebasing election; and
- taking advantage of the TRF during the three-year eligibility period starting in 2025/26.
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. This type of relief will be abolished when the TRF period ends.
3. Adopting an investment strategy that favours capital growth over income generation for personally-held assets. The position may be different for settlors of settlor-excluded trusts for income tax purposes.
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 non-doms 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 the individual is 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 defences and/or double tax treaty relief, and in light of the underlying investments; and
- identify appropriate planning that may be carried out before 6 April 2025, such as:
- making distributions, which will be matched to trust income and/or gain, but received by non-dom beneficiaries with the benefit of the remittance basis in 2024/25;
- realising FIG within trust structures, with a view to their being matched against distributions during the TRF availability period; and
- ensuring that liquidity is available at the right level of the structure, where relevant property charges will be incurred in LTR-settled trusts.
6. Making use of alternatives to trusts, such as Family Investment Companies/Family Limited Partnerships and Open-Ended Investment Companies in appropriate circumstances (also depending on the underlying investments) to increase the after-tax efficiency of long-term returns and/or fragment ownership for IHT/estate planning purposes.
IHT
7. Creating a trust. For non-LTR settlors, the IHT position remains as favourable as at present. Where the settlor will become LTR, but the trust is not settlor-interested, the value of the trust assets will not form part of any relevant individual’s personal estate and be subject to IHT at 40%. With LTR-settled trusts, despite such exclusion, IHT charges of up to 6% will apply on ten-yearly anniversaries and on exit, subject to available exemptions and reliefs but this may be a tolerable trade-off, for non-tax reasons. Trusts created by non-UK resident settlors for the benefit of UK resident family members (e.g. UK resident next generation trusts) remain the sweet-spot for trust planning, avoiding both IHT charges or income tax and capital gains tax charges unless and until capital payments or other benefits are received by UK residents and matched against FIG arising in the trust.
8. Assessing the impact of the non-dom reforms in the context of available estate treaties, in appropriate circumstances.
This is a generic overview only of how the proposed changes, if enacted in their current form, may impact affected non-doms. Tailored advice to suit clients’ individual circumstances should be obtained in each case. Although the proposed reforms remain subject to change until enacted, early advice is essential. We would be pleased to assist with this, if desired.
The analysis in this note is based on the new non-dom rules as announced in the Autumn Budget on 30 October 2024, as detailed in the government’s technical note published on 30 October 2024 and the draft legislation published on 7 November 2024. These have given clarity about the framework of the non-dom reforms, although technical changes may be introduced between now and the implementation of the rules on 6 April 2025.