I am UK resident but non-UK domiciled (“non-dom”) and have been in the UK for longer than ten years. Should I stay or should I go?
Income and capital gains tax
Non-doms who have been resident in the UK for longer than four tax years as at 6 April 2025 (“affected non-doms“) will not qualify for the new four-year exemption regime (“four-year FIG regime“) for foreign income and gains (“FIG“) which is being legislated as part of Finance Bill 2025. This means that, as a consequence of the other tax changes that are expected to come into effect, from 6 April 2025, affected non-doms will be subject to UK tax on their annual global income and gains as they arise at their applicable marginal rates, subject to any applicable double tax treaties and certain transitional rules. The remittance basis of taxation is being abolished from 6 April 2025.
The transitional rules for affected non-doms are set out in our separate article “Non-dom reforms: the four year itch“, but it is useful to briefly set them out here too. They are as follows:
- an option to rebase personally held foreign assets to their 5 April 2017 market value for disposals by non-doms after 5 April 2025; and
- a “Temporary Repatriation Facility” (“TRF“) that will allow non-doms to designate under this facility, during a three-year availability period starting in 2025/26, FIG which have arisen before 6 April 2025, and bear UK tax on them at a rate of 12% in the tax years 2025/26 and 2026/27, and 15% in the tax year 2027/28,
in each case, subject to certain conditions being met.
Inheritance tax (“IHT”) for personal assets
From 6 April 2025, non-doms who have been resident in the UK for at least ten of the previous twenty UK tax years will be regarded as “long-term resident” in the UK (“LTR“) and so their global assets will be within the scope of IHT on death and in relation to certain lifetime gifts, subject to any available reliefs and exemptions. Such potential IHT exposure will continue for a “tail” period, if the LTR ceases to be UK resident. Subject to transitional rules, the duration of the IHT tail will be between three and ten years, depending on the number of tax years that the LTR was UK resident during the twenty tax years before their departure from the UK: the greater the number of years of UK residence, the longer the IHT tail. So if an LTR leaves the UK having been resident for ten to thirteen tax years out of the previous twenty tax years, they will have an IHT tail for three tax years, following their departure from the UK. The tail increases by a tax year for every additional year the LTR has been resident in the UK until reaching a maximum IHT tail of ten tax years following departure from the UK for any LTR who leaves the UK after being UK resident for all of the previous twenty tax years.
Under the current regime, potential exposure to IHT on death and in respect of certain lifetime gifts operates by reference to the domicile of the individual or donor. On that basis, for non-doms who are not UK deemed domiciled (having been UK tax resident for at least fifteen out of the previous twenty UK tax years), only their UK-situs assets and indirect interests in UK residential property (including “relevant loans” in connection with such) are within the scope of IHT.
For LTRs, subject to available exemptions and reliefs, from 6 April 2025, IHT will be levied on the value of their global assets at the time of death, as well as any:
- UK-situs assets they have gifted during the seven years preceding their death;
- foreign situs assets which were gifted once they became LTR and within the seven years preceding their death; and
- lifetime transfers to certain types of trusts in which they have “reserved a benefit”.
The current rate of IHT is 40% and the maximum available nil-rate band is £325,000. The spouse exemption remains available. However, in the Autumn Budget 2024, the government has proposed significant changes to IHT relief for business and agricultural assets with effect from 6 April 2026. These may also affect potential IHT liabilities for non-doms who hold qualifying assets in the UK or abroad, depending on whether the individual is LTR or not at the relevant time.
Taxation of existing offshore trusts
A number of affected non-doms will have created offshore family trusts of which they are the settlor and within the beneficial class.
IHT
Under the current rules, a non-dom (whether UK resident or not) can create and fund an offshore trust and, provided that (i) the assets of the trust do not comprise any UK-situs assets held directly at trust level or indirect interests in UK residential property (including “relevant loans” in connection with such) at any level; and (ii) no assets are added to the trust once the settlor has become UK deemed domiciled or acquired a UK domicile of choice, the trust assets will be outside the scope of IHT during the existence of the trust and on the death of the settlor or any of the beneficiaries. This would be the case even if the settlor or any of the beneficiaries become UK deemed domiciled or acquire a UK domicile of choice. Such trusts are known as “excluded property trusts” for IHT purposes.
From 6 April 2025, the IHT status of an excluded property trust will no longer follow the domicile status of the settlor at the time the assets are added to it. Instead, assets of the trust (where the trust fund does not comprise any UK-situs assets held directly at trust level or indirect UK residential property interests (and any relevant loans connected to such interests) at any level) will only be out of the scope of IHT (as “excluded property”) at such times when the settlor is not LTR – i.e. when the settlor has not been UK resident for long enough to be LTR, or they have been non-UK resident for a sufficient number of UK tax years to break their IHT “tail” if they were previously an LTR.
For excluded property trusts that were in existence on 30 October 2024 and to which no further value is added on or after that date, the settled assets will not fall within the estate of a settlor who is LTR on death under the IHT “gift with reservation of benefit” rules, and therefore will not result in a 40% IHT liability on the market value of the trust assets at that time.
However, any assets held in an excluded property trust in existence on 30 October 2024 will, once the settlor is LTR, be “relevant property” and thus within the scope of IHT, unless the settlor is irrevocably excluded from benefitting under the terms of the trust before then. The trust assets will be subject to:
- IHT charges on every ten yearly anniversary of the creation of the excluded property trust up to a maximum rate of 6% at present on the market value of the trust assets, subject to the available nil-rate band; and
- IHT “exit” charges when relevant property leaves the trust as a proportion of the ten-yearly charge (calculated by reference to how many quarters have elapsed since the date of the last ten-yearly anniversary, rising by 0.15% per quarter) up to a maximum of 6% at present.
If the settlor of the trust leaves the UK before becoming LTR, the trust will remain outside the scope of IHT. However, if the settlor leaves the UK having become LTR, then an IHT exit charge (up to a maximum rate of 6% at current rates) will arise by reference to the market value of the settled assets when the settlor ceases to be LTR – i.e. once the settlor has been non-UK resident for a sufficient number of UK tax years to break their “IHT tail”, at which point the trust assets will “exit” the IHT relevant property regime (hence the IHT charge).
For many affected non-doms who are the settlors of existing excluded property trusts, these potential IHT charges could be significant. The funding of how these IHT charges would be met by the trustees as they arise also needs to be considered if such trusts are to be retained, noting that creating liquidity to meet these IHT liabilities after 5 April 2025 could result in additional income tax and capital gains tax liabilities for the UK resident settlor. This new IHT treatment for excluded property trusts in existence on 30 October 2024 is a marked change from the current rules, and also the original proposals announced by the Conservative government in the Spring Budget of March 2024, under which excluded property trusts established and funded before 6 April 2025 were to retain their protected IHT status.
Income tax and capital gains tax
At present, most income and gains arising in an offshore trust or in any underlying company held in an offshore trust are not taxed in the hands of a UK resident foreign domiciled settlor as they arise (even once they are deemed domiciled for UK tax purposes), under the “protected settlements” regime. This requires that no value is added to such a trust or to any underlying company in the trust by the settlor after they are deemed UK domiciled, or by certain entities connected to the settlor. Any benefits provided to UK resident beneficiaries of offshore trusts are subject to UK tax to the extent that they are matched with income and gains accumulated in the trust and which have not already been taxed on the UK resident settlor, subject to the availability of the remittance basis.
From 6 April 2025, the protected settlements regime will be abolished. This means that all income and gains (arising at any level) in an offshore discretionary trust which is “settlor interested” will, from 6 April 2025, be attributed to the affected non-dom settlor and subject to UK tax at their applicable marginal rates, subject to applicable double tax treaties. Any FIG which arose in the trust structure before 6 April 2025 will come within the scope of UK tax when they are “matched” with capital payments or other benefits received by UK resident beneficiaries.
So, should I stay or should I go?
The extent to which the new tax regime from 6 April 2025 will impact affected non-doms will differ from person to person.
For some, having potential IHT exposure on their worldwide estate and bringing assets held in excluded property trusts within the scope of IHT whilst the affected non-dom is LTR (which could result in an IHT tail of up to ten tax years following departure from the UK) will be hugely significant when deciding whether to leave the UK or not.
For some affected non-doms who enjoy high levels of FIG, the new regime for worldwide taxation could be costly if relief under any applicable double tax treaty is not available or restricted, and available options to mitigate any adverse UK income tax and capital gains tax implications do not provide an acceptable tax position to remain in the UK.
Option 1: Leave the UK
If an affected non-dom considers this the best option for them, then 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 resident status satisfactorily to HM Revenue & Customs under the UK’s statutory residence test (for further information on this please click here). Tax advice should be obtained in each of the UK and their chosen new jurisdiction.
For income and capital gains tax purposes, if the affected non-dom is successful in ceasing to be UK tax resident, there will be no UK income tax and capital gains tax due on their FIG (other than UK-property related gains) for the duration of their non-UK tax residency period. This is provided that they are not caught by “temporary non-resident” rules, because they return to the UK within five years. In light of the proposed tax changes, it would be optimal for non-residents not to return to the UK until they have been non-UK resident for at least ten consecutive UK tax years to enable them to benefit from the four-year FIG regime on their return to the UK.
The IHT position for leavers has now been clarified. A transitional rule will apply to UK leavers who are non-UK domiciled as at 30 October 2024 and are non-UK resident in tax year 2025/26 and remain so subsequently, the effect of which is that the new LTR test will not apply to them. This means that if an affected non-dom is:
- not deemed UK domiciled in the current tax year (2024/25) and is or becomes non-UK resident from 6 April 2025, they will have no IHT tail; and
- is deemed UK domiciled, then if they become non-UK resident from 6 April 2025 and remain so subsequently, they will cease to be LTR on 6 April 2028 and have an IHT tail for three years if they remain non-UK resident in the fourth.
In either case, if they wish to return to the UK, then they should remain non-UK resident for at least ten consecutive UK tax years before their return, to reset their clock for the purposes of the LTR rules.
For all other affected non-doms who wish to leave the UK after 5 April 2025, the duration of the IHT tail will be between three and ten years, depending on the number of tax years that the LTR was UK resident over the twenty tax years before their departure from the UK.
Option 2: Stay in the UK
Affected non-doms who choose to stay in the UK will be subject to UK income tax and capital gains tax on an arising basis from 6 April 2025:
- on their personal FIG, including any matched capital payments or other benefits from offshore trusts they are beneficiaries of (subject to the transitional rules mentioned above); and
- in respect of FIG which arise in any offshore trusts settled by them, where the trust is “settlor-interested” for income tax and/or capital gains tax purposes,
at their marginal rates, subject to applicable double tax treaties.
Pre-6 April 2025 FIG in such offshore trusts will be brought into the UK tax net if and when they are matched to post-6 April 2025 benefits provided to UK resident beneficiaries (subject to the availability of the TRF).
Affected non-doms will also:
- have their worldwide estates exposed to IHT during any period in which they are LTR; and
- face IHT exposure in any existing excluded property trusts of which they are a settlor, as they are brought into the scope of IHT, resulting in ten-yearly anniversary charges and exit charges, as mentioned above.
The planning options available to such individuals are set out in our separate article “Non-dom analysis: the four year itch“.
Some affected non-doms who are minded to leave the UK, may now opt to stay to take advantage of the transitional rules (with the TRF providing reduced tax rates until 5 April 2028), providing FIG generation post-5 April 2025 is not likely to be significant or can be deferred, and if the potential IHT implications can be tolerated (noting, however, that in many cases they will have an IHT tail on leaving the UK in the future, as discussed above).
There are so many aspects for affected non-doms to consider before 6 April 2025 and, given the short window of opportunity allowed by the government following their clarification of the non-dom measures in the Autumn Budget on 30 October 2024, affected non-doms should take advice as to their available options as a matter of priority.
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.