Potential tax changes for UK non-doms

With the next general election on the horizon, we now have a better understanding (albeit subject to consultation) as to how the Conservative government – or a future Labour government – would reform the UK tax regime.

The current laws applicable to individuals that are UK tax resident, but non-UK domiciled (non-doms) have, in particular, been subject to scrutiny.

Ahead of the upcoming election, it’s helpful to reflect on the changes recently announced by the Chancellor in his Spring Budget and the Labour Party’s proposals, and how the proposed changes by both parties may impact non-doms living in the UK.

What is the current tax policy for UK non-doms?

Most UK tax residents are taxed on the arising basis, which means they are liable to UK tax on their worldwide income and gains.

However, those who are UK tax resident but non-dom can choose to be taxed on the remittance basis of taxation as opposed to the usual arising basis. Those claiming the remittance basis will be subject to UK tax on their UK source income and gains, but only liable to UK tax on their foreign income and gains that are remitted to or enjoyed in the UK.

A consequence of claiming the remittance basis is that the individual will lose their entitlement to the personal allowance and capital gains tax annual exempt amount for the tax year that the claim is made. There’s no charge to use the remittance basis until an individual has been UK resident for more than seven out of the previous nine tax years. After that, it costs £30,000 each year to claim the remittance basis. This charge increases to £60,000 once an individual has been resident for more than 12 years.

Once an individual has been UK tax resident for 15 out of the previous 20 tax years, they’ll be deemed-domiciled in the UK for tax purposes and no longer able to claim the remittance basis.

Non-doms are also only subject to inheritance tax (IHT) on their UK situs assets, whereas individuals domiciled in the UK (including those who are deemed-domiciled for tax purposes) are subject to IHT on their worldwide assets (although reliefs may apply). This is the case, regardless of where the individual is resident at the date of death.

There are also differences in the way in which anti-avoidance provisions are applied to non-UK domiciled individuals, particularly in respect of trusts. If you are a beneficiary of a trust or are considering setting up a trust, seeking UK tax advice is vital.

What are the proposed changes to the UK tax regime?

Conservative Party proposals

In his Spring Budget, the Chancellor announced significant reforms to the non-dom tax regime, replacing the current regime with a new residency-based system. The proposed changes are explained further in our article on the new tax regime for UK non-doms.

In summary, from 6 April 2025, the existing remittance basis rules will be replaced by a foreign income and gains (FIG) regime. The FIG regime will apply to individuals who become UK tax resident after a period of at least 10 consecutive tax years of non-UK tax residence. Relevant individuals can claim relief under the FIG regime in their first four years of UK tax residency. Under the FIG regime, individuals will not be subject to UK tax on their foreign income and gains, regardless of whether these funds are remitted to the UK.

Additionally, individuals who are already resident in the UK (irrespective of their domicile position) but have been UK tax resident for less than four years (following 10 consecutive years of non-residence) will be able to claim relief under the new regime for any tax year of UK residence in the remainder of the four-year period.

For individuals who move from the remittance basis to the arising basis from 6 April 2025 and who are not eligible for the four-year FIG regime, there will be a one-year reduction in the amount of foreign income that will be subject to UK tax. For foreign income arising in 2025-26, only 50% of foreign income will be subject to tax. However, the reduction will not apply to foreign chargeable gains. In addition, there will be transitional provisions for remittances during the 2025-26 and 2026-27 tax years, plus capital gains tax rebasing for some individuals.

The government also intends to consult on changing the IHT system to a residence-based system. We currently have very few details on how this may look, but they have suggested a possible ten-year window before individuals become taxable on their worldwide assets, and a corresponding ten-year tail for those leaving the UK.

While the current rules for UK resident beneficiaries of non-UK trusts will remain broadly the same, from 6 April 2025, the current protections from UK tax on income and gains arising within settlor-interested trust structures will cease for taxpayers who will not qualify for the new FIG regime.

However, the government has confirmed that the current IHT exemptions regarding excluded property will continue to apply for non-UK assets settled into trust by a non-UK domiciled settlor prior to 6 April 2025.

Labour Party proposals

In contrast, Rachel Reeves, the UK’s Shadow Chancellor, has promised to go further than the government’s proposed changes if elected.

Labour have confirmed they will scrap the proposed 50% reduction on the amount of foreign income subject to tax in 2025-26, when the new rules come into force. While this will only impact individuals who are currently taxed on the remittance basis and are not eligible for the new four-year FIG regime, it presents a cliff-edge for those who are not currently subject to UK tax on their foreign income under current rules.

In addition, Labour has proposed removing the grace period announced by the Chancellor in the Spring Budget giving non-doms until 5 April 2025 to settle non-UK assets into trust and benefit from the current IHT protections. At present, it is unclear whether Labour’s proposal would amount to an outright removal of the excluded property status.

The overall impact of changes to the excluded property status will largely depend on the outcome of the upcoming IHT consultations.

It has also been speculated in the media that reforms may be made to two of the existing IHT exemptions, Business Property Relief (BPR) and Agricultural Property Relief (APR).

Should I leave the UK for tax purposes?

In light of the uncertainty around the UK tax regime, many individuals are considering the option of relocating to another jurisdiction. If you’re thinking about moving abroad, there are many factors to take into account:

1. Does the jurisdiction you are considering suit your family’s needs? Key considerations for moving to or remaining in the UK include high standards of schooling and education at all levels, relatively high standards of personal safety for a large, developed economy, use of English as a first language, and a combination of a rich traditional and international culture. In many cases, these factors will be the most impactful on family happiness and success.
2. What is the tax regime? Whether you’re looking for a tax advantaged jurisdiction, or simply one with more certainty, it’s important to get specific advice on how you’ll be taxed once a resident there.
3. Will you need a visa or residency permit? It’s also important to understand if and how you can become a resident.
4. When will you cease to become UK tax resident? This may be the end of the tax year in which you leave (ie 5 April) or could be earlier if you qualify for split year treatment. For more information, visit the UK’s Statutory Residence Test article.
5. Can you remain non-UK tax resident? Individuals are limited on how much time they can spend in the UK without being considered UK resident. This varies depending on an individual’s circumstances. If you’re thinking of moving abroad, it’s important to consider how much time you’ll want to spend in the UK and if it’s feasible to become non-resident.

How we can help

We provide advice and support to UK non-doms, and we are also part of Nexia, a global network of independent accounting and consulting firms that operate internationally in 125 countries. This means we can provide you with multi-jurisdictional support to find the right solution.

If you’d like to understand more about this topic and the options available to you, please get in touch with Alexandra Britton-Davis.