Changes to the tax regime for non-domiciled individuals (those living in the UK but with their ‘permanent home’ abroad) were first announced in the Spring Budget. Now that we are under a Labour government, we are waiting to learn the finer details of the changes but the broad position is that we will be moving away from a regime based on the concept of domicile, which will be replaced by a system based on residence.
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:
What are the potential downsides?
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:
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.
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