Opinion:
Will the forthcoming changes to the tax regime for non-domiciled individuals deter people from coming to the UK?

What?

In summary, under the new income and gains regime for individuals who become UK tax resident, no tax will be paid on foreign income or gains in the first four years of residency and funds can be brought to the UK free from additional charges (although the funds would, of course, then be situated in the UK for inheritance tax (IHT) purposes).  Individuals who have not been UK resident for four years when the changes come in, can benefit from the new regime for the remainder of those first four years. After the initial four years, individuals will be subject to UK tax on their worldwide assets, including income and gains arising on non-UK structures such as trusts.

From an IHT perspective, it is expected that individuals will pay IHT on all their assets (worldwide) once they have been resident in the UK for ten tax years.  If they leave the UK, there will be a ten year ‘tail’ before they will be treated as non-resident again.

When?

The Conservatives had planned to bring in changes from 6 April 2025 and we are yet to learn whether Labour intend to keep to this timeline.  Whilst there is fiscal pressure to make the changes as soon as possible it is thought that there will not be a Budget or Autumn Statement until mid – September, leaving a short timeframe of six months or less to draft and pass legislation to enact the changes.

Why?

The changes are predominantly being introduced with a view to raising revenue. The latest figures from HMRC indicated that in 2022/23 74,000 people claimed non-domiciled status.  It is estimated that the new regime will raise an additional £2.7bn annually by 2028/29.  The adage ‘don’t let the tax tail wag the dog’ may spring to mind but there are other arguments in favour of the changes:

• The current regime is based on the subjective concept of domicile, with someone’s domicile sometimes being very difficult to determine – often resulting in protracted arguments between executors and HMRC after the individual has died, causing delays to estate administration. By contrast, number of years residence in the UK, which underpins the new system, is objective and measurable. This will provide greater certainty to taxpayers.
• The new regime is arguably fairer in that individuals will only benefit from tax advantages for the first four years of residence in the UK. Under the current regime, it is possible to benefit for 15 years and arguably be permanently settled in the UK, whilst not being treated as full UK tax-payers. There is concern that four years is too short though, comparative to tax advantages offered by other countries, which may deter individuals from coming to the UK at a time when other European countries have introduced measures to attract the wealthy.
• It is also fairer, in that, unlike the current regime, it will apply to individuals who want to move to the UK permanently as well as those who intend to leave again.
• The new regime may be particularly appealing to non-residents wanting to realise a large gain, which would otherwise be taxable in the country they currently live. They could potentially move to the UK and, as long as they realise the non-UK gain within the first four years of residency would not pay tax on it.

What are the potential downsides?

• Whilst it is estimated that the changes will generate more revenue from ‘non-doms’, there is a risk that some individuals may leave the UK. Not only will this result in the government foregoing the additional revenue but they will also lose the UK tax that the individuals are currently paying as well as investment in the UK that these individuals might bring.
• It is quite likely that we are already seeing a decline in the number of people considering moving to the UK. This is hard to quantify, however.

There is an argument that we have seen changes to the non-domicile regime before, in 2017 when the fifteen year cap on claiming non-domiciled status was introduced, and this didn’t lead to a mass departure from the UK.  However, many individuals were able to take a segue in their tax planning, diverting assets to trusts.  Under the new regime, the present income tax and capital gains tax protection afforded to non-UK trusts will be removed, where the settlor is UK resident (and does not qualify for the four year foreign income and gains regime).

What should I, as a non-domiciled individual, do now?

The full impact of the changes remains to be seen and whilst we don’t have full details of the changes or know precisely when they are coming into force, non-domiciled individuals should be taking the following actions now, so that they can make decisions and act quickly once the details have been finalised:

• Consideration of their plan for residence in the UK – short, medium and long term and where they currently stand in terms of years residence here;
• Taking stock of their estate and it’s make up – what assets do they have, in what structures and where situated?;
• Obtaining tailored advice from their trusted advisers such as solicitors, accountants and financial advisers on the impact that the changes may have on them and any steps they can consider to reduce any negative tax implications. It is possible that there will only be a relatively short window in which to take action, at a time when advisers, trustees and others involved in these matters may be extremely busy.

If you will or may be affected by the changes to the non-domicile tax regime, we are here to help. Please contact our Wealth Preservation team for advice.