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Autumn Budget: Non-UK Domiciled Reform
In the Spring budget, under the previous Government, a complete overhaul to the non-dom regime was announced. The idea being to switch from a domicile-based system to a residency-based system for income tax, capital gains tax and inheritance tax.
The past seven months has yielded considerable worry, anxiety and general curiosity as to what the new Government will do with the proposed changes. Whilst it was generally accepted that they were in favour of the changes, it was not so clear as to what those changes would be.
Following today’s budget, we now have considerably more certainty as to what these changes are and who will be impacted. Broadly, if you fall within the following 3 categories you will need to consider your position:
- you are non-UK domiciled and are UK resident,
- you have been out of the UK for a considerable amount of time,
- you are a non-UK domiciled individual who has an offshore structure established under previous rules.
The most recent changes to the non-UK dom regime were in 2017, and these were substantial. However, we now have confirmation of the biggest overhaul in recent history. Whilst the non-UK dom regime is being all but eradicated from the UK tax system, and even confirmed as being “abolished from the UK tax system” it does remain paramount in a few specific cases. For example, inheritance tax treaty provisions (of which there are 10), will still use the legal concept of domicile and this will be important and relevant to your overall position. It is significant to note that treaties override domestic legislation and the Government have confirmed there are no changes to these treaties.
However, for most non-domiciled individuals in the UK the changes announced today will have huge implications for them. Most notably the two biggest changes are the removal of the remittance basis and the changes to inheritance tax (‘IHT’). All of the proposed changes will be implemented with effect from 6 April 2025.
Remittance basis
Until now, non-UK domiciled individuals could claim the remittance basis of taxation which, broadly, prevents their offshore income and gains from being subject to UK taxation so long as those income and gains are not remitted to the UK for up to the first 15 years of UK residence.
This is being replaced by the “FIG” regime whereby individuals who have not been resident in the UK in the immediately previous 10 tax years can claim the FIG regime, preventing their foreign income and gains from being subject to UK taxation in their first four years of residence. Whilst this is a considerable reduction in the length of time available, the individuals do have the ability to remit those funds to the UK without suffering UK tax on them. In addition, UK national and UK domiciled individuals can also benefit from the FIG regime.
As with the remittance basis, claiming the FIG regime will mean the individual cannot benefit from a personal allowance for income tax, or an annual exempt amount for capital gains tax.
Overseas Workday Relief will be retained and reformed, with the relief extended to a four-year period and the need to keep the income offshore removed. The amount claimed annually will be limited to the lower of £300,000 or 30% of the employee’s net employment income.
Inheritance tax
The second biggest change is in relation to IHT. Currently, non-domiciled individuals are only subject to UK IHT on their UK situs assets in their first 15 years of residence (or until they have been resident in the UK for 15 of the previous 20 tax years), at this point they will be considered deemed domiciled for UK IHT purposes. However, these individuals currently can settle an excluded property trust. This is a trust set up offshore, with offshore assets, prior to becoming deemed domiciled. The trust’s assets remain outside of the scope of UK IHT even once the individual becomes deemed domiciled. The income and gains accumulated within these structures may also be free from UK taxation.
The budget today effectively changed all of the above. Now individuals who have been resident in the UK for 10 out of the previous 20 tax years will be subject to UK IHT on their worldwide assets and the individual will need to leave the UK for 10 years before this status falls away. In addition to this the use of excluded property trusts for individuals approaching 15 years of residence will cease.
Excluded property trusts will still be able to be used, but once the settlor has been resident in the UK for 10 out of the previous 20 tax years, the trust will be subject to UK IHT. If the Settlor later leaves the UK, the trust may cease to be subject to UK IHT, once the settlor is also no longer subject to IHT. If the trust is settlor interested, the income and gains arising in the trust whilst the settlor is UK resident will be taxable directly on the settlor.
However, on the flip side, this now means that UK domiciled individuals, who would have previously been subject to UK IHT on their worldwide estate for life, irrelevant of where they lived, can now escape UK IHT if they leave the UK for 10 consecutive tax years.
Temporary repatriation facility (‘TRF’)
- The previous Government announced there would be some measures instilled to reduce the impact of these changes on non-UK domiciled individuals. This has been confirmed in the budget, as follows:
- Reduced tax charge of 12% for the 2025/26 and 2026/27 tax years on remitted foreign income and gains, that were previously protected by the remittance basis. The rate increases to 15% for the 2027/28 tax year before normalising at standard income and capital gains tax rates on remittances thereafter.
- If you are a UK resident settlor or beneficiary of an offshore trust and have previously claimed the remittance basis you can receive distributions, or benefits, of foreign income and gains during these tax years and pay tax under the TRF rates.
- Current and past remittance basis users will be able to rebase personally held foreign assets to their value on 5 April 2017.
Planning
These changes will certainly cause existing non-UK domiciled individuals some concern. However, there are potential planning opportunities available and some need to be actioned sooner rather than later. If you believe you may be impacted by the changes, please get in touch with our dedicated Private Client Team.
If you have any questions on any of the subjects raised in this update, please contact our team to find out more.
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