During Jeremy Hunt’s Spring last Budget speech, sweeping changes were announced where he promised to “…get rid of the outdated concept or domicile and the remittance basis… and replace it with a modern, simpler and fairer residency-based system“. Given that the link between domicile and the remittance basis can be traced back to 1914, it is perhaps unsurprising that modernisation is proposed, particularly in a world where technology, travel and remote working are everyday parts of business and personal life.
A very brief recap of the current system is that a non-domicile (“non-dom”) is someone whose origin is overseas but lives in the UK although does not make it their permanent home. This status affords some significant tax breaks, such as immunity to inheritance tax on assets held outside the UK, and a shelter from tax on income and gains retained outside the UK (the remittance basis) subject to paying a remittance basis charge after being resident for at least seven of the previous nine years.
Some criticisms of the current rules are that it mostly benefits the wealthy, discourages investment in the UK, and is complicated in operation.
To summarise, the changes proposed by the outgoing government, which have largely been accepted by the Labour party, where:
- Abolish domicile as it stands in relation to taxation
- Abolish the remittance basis
- Introduce a four-year exemption for foreign income and gains for those who move to the UK (provided they were not resident in the UK at any time in the previous ten tax years). This includes benefits received by individuals from foreign trusts.
This means that people moving here after long periods overseas will not pay tax on foreign income and gains and are free to remit it to the UK for the first four years. This will be much more beneficial for affected taxpayers than the current system but is only short lived.
Current non-doms
Transitional arrangements were also proposed for those who already live in the UK, and benefit from the existing non-domicile regime, as follows:
- Overseas assets will be rebased to their April 2019 market value (does not include trusts).
- A 50% relief from income tax on foreign earnings and investments for the first year of the new rules (2025/26).
- A temporary repatriation facility between 6 April 2025 and 5 April 2027, which will allow amounts, on which the remittance basis was previously claimed, to be sent to the UK at a flat rate tax charge of 12%.
Labour have stated, however, that they will not adopt the Conservative proposals for transitional arrangements including that they would remove the proposal for 50% income tax relief in the 2025/26 tax year.
They also confirmed that they would look to offer additional incentives for non-doms to repatriate untaxed income and gains to the UK after the two year period highlighted above expires.
Inheritance Tax
At present, a non-dom born outside the UK will not be charged to tax on their overseas estate unless they have been resident for at least fifteen of the previous twenty years. Non-doms will usually lose exposure to UK inheritance tax on overseas assets after at least six years of non-residence in any twenty year period.
It is proposed that ten years of residence will expose the taxpayer’s worldwide estate to UK taxation, and that after leaving the UK, this will continue for another ten years. For many, this will bring assets into charge five years earlier than anticipated and leave assets in charge for four years longer than expected after leaving .
Foreign trust planning
Non-domiciled but resident settlors of offshore trusts also face some stark choices. It is proposed that the “trust protections” will be removed. This means that settlors will be charged to capital gains tax on sales within overseas trust structures, even if they are excluded from benefit. This may also apply to income arising in the trust as well, although exclusion from benefit may be effective depending on the history of the trust and amounts the settlor has previously benefitted from.
Mitigation options to consider could include changing the trust’s investment strategy, the settlor leaving the UK, or even sell and rebase the assets while the current rules still apply.
Labour have confirmed that they plan to close down the inheritance tax planning opportunities via excluded property under the new regime which would render offshore trust planning for inheritance tax obsolete. Further, this would appear to have ‘retroactive’ effect, in that trusts settled before enactment of the law will be caught.
The above summary is based on the announcements made on Budget Day, and supporting releases issued by the Treasury at the same time. There is very little further detail in circulation at present, and given that the proposed changes are from 6 April 2025, along with a new government now in place, it is unlikely there will be draft legislation or guidance issued until the Autumn at the very earliest.
This landscape can be complex to navigate so seeking expert advice is always best. Click the button below to access the Summer edition of our Talking Tax publication and read more about the topics discussed in this article.
