Changes to the taxation of non-domiciled individuals – the new government's proposals

The Chancellor, Rachel Reeves, made a speech on 29 July discussing the Government's plans to restore economic stability to the UK.  As part of that, she reiterated the Government's commitment to replace "the outdated non-domicile regime with a new internationally competitive residence-based regime".

A policy paper published by HM Treasury alongside the Chancellor's speech summarised what the new regime will look like, as follows:

FOREIGN INCOME AND GAINS

Main provisions

• Preferential tax treatment based on an individual's domicile status will end for foreign income and gains (FIG) that arises from 6 April 2025.
• To replace the remittance basis, the government will introduce the 4-year foreign income and gains (FIG) regime announced by the previous government at the Spring Budget and outlined in our briefing note here;
• Under this regime, new arrivals to the UK will be entitled to 100% relief from tax on FIG in their first 4 years of tax residence (provided they have not been tax resident in any of the 10 consecutive years prior to arrival);
• The protection from tax on FIG arising in settlor-interested trust structures will be withdrawn for individuals who do not qualify for the FIG regime.

Transitional arrangements:

• The 50% reduction in foreign income subject to tax for individuals not entitled to the remittance basis in 2025/26 that was proposed by the previous government will not be introduced;
• UK residents who are ineligible for the FIG regime, or choose not to claim it for a tax year, will be subject to CGT in the normal way. However, current and past remittance basis users will be able to rebase their foreign capital assets to their value at a specified rebasing date when they dispose of them.  This rebasing date will be announced at the Budget on 30 October (for context, the previous government had proposed the date of 5 April 2019).
• Any FIG arising before 6 April 2025, while the individual was a remittance basis user, will continue to be taxed when remitted to the UK.  This includes remittances of pre-6 April 2025 FIG for those eligible for the FIG regime.
• Temporary Repatriation Facility
  • A Temporary Repatriation Facility (TRF) will be available for previous remittance basis users, who will be able to remit FIG that arose prior to 6 April 2025 and pay a reduced tax rate for a limited period after the remittance basis ends.  The policy paper indicates that the rate and period for this will be made as attractive as possible. 
  • For context, in relation to their planned TRF, the previous government proposed a rate of 12% and a period of two years (6 April 2025 to 5 April 2027).
  • The paper indicates that the government is looking at expanding the TRF to include stockpiled income and gains within overseas structures, and will confirm details at the Budget.  This contrasts with the previous government's proposals, under which the TRF was not to apply to FIG arising in trusts. 

RESIDENCE-BASED REGIME FOR INHERITANCE TAX (IHT)

• From 6 April 2025, the current domicile-based system for IHT will be replaced with one that is residence-based, and this will apply to both individuals and trusts.
• The government proposes that the basic test will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises.
• They will then remain within the scope of IHT for 10 years after leaving the UK.  These are the same broad proposals as those being considered by the previous government.
• The estates of those who die before 6 April 2025 will be taxed to IHT under the existing rules.
• The use of excluded property trusts to keep assets outside the scope of IHT will be ended, and the way IHT is charged on non-UK assets held in such trusts will be changed so that everyone who is in scope of UK IHT (i.e. has been resident for 10 years prior to the relevant tax year) will be required to pay tax under the same rules.
• The government is considering how to allow for adjustment of existing trust arrangements, set up under the current rules, while ensuring that the IHT treatment of all long-term UK residents is the same. 
• The paper indicates that the new rules, their detailed application, and transitional arrangements for settlors will be published at the Budget, following external engagement.
• There will not be a formal policy consultation on moving to a residence-based system for IHT – the paper indicates that the government will review feedback received since the Spring Budget. Such feedback related to the previous government's proposals, and the paper published by the Labour party in April setting out their comments and intentions in relation to these proposals. The government will carry out further engagement over the summer on IHT policy design.

OTHER MEASURES INCLUDED IN THE POLICY PAPER

• Review of anti-avoidance legislation - the government plans a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation – it is not anticipated any changes will result before the start of tax year 2026/27.
• Overseas Workday Relief - a form of Overseas Workday Relief will be retained.

COMMENTS AND INITIAL THOUGHTS

Foreign income and gains

After months of uncertainty for non-doms since March, the new policy paper is welcome in so far as it provides one element of certainty. The remittance basis regime will be replaced by a residence-based regime, and will do so with effect from 6 April 2025.

The 4-year grace period for those arriving in the UK is lower than many other countries, and the 10-year tail is longer, and this may make the UK relatively less attractive to overseas individuals considering moving here. However, a residence-based system promises to be less complex than one based on domicile, and it should be easier for individuals to be certain where they fall within the regime. 

The policy paper is relatively clear in relation to how foreign income and gains will be treated in future.  However, there are still significant points on which further detail is required in relation to the transitional measures proposed.  These include the date for CGT rebasing, the way in which stockpiled income and gains in overseas structures will be included within the TRF – a welcome departure from the previous government's plans – and the tax rate and period for the TRF more generally. 

IHT – general provisions

The position is similar in relation to the IHT proposals.  For personally-held assets, clarification is still required in relation to the detail of the new rules.  However, the proposed 10-year residence period before an individual comes within the scope of IHT should allow new and recently arrived people time to make plans for the future, whether they are to remain in the UK or otherwise.

The 10-year period in which departing individuals will remain within the scope of IHT is lengthy, and there may be issues with enforcement. However, the new residence-based approach does have an advantage for UK domiciled individuals who are planning to leave the UK.  After 10 years outside the country, they should no longer need to worry about whether they continue to be UK domiciled for tax purposes.  Instead, their liability to tax, IHT or otherwise, will be based purely on a test of residence.

IHT – property held in trust

The position is even less clear for those with property held in overseas trusts. 

As a general point, it is disappointing that the government intends to proceed with its plans to bring all property held in trust within the scope of IHT, even if such property was acquired by an individual long before they came to the UK. 

With that said, the main issue is that the policy paper provides only vague indications as to how the government proposes to impose IHT, and whether tax will be charged by reference to the residence of settlors, beneficiaries, or both.  It is encouraging that it is looking at a mechanism for adjusting existing trust arrangements, as well as transitional rules for affected settlors.  However, as almost all the detail of the new rules will be announced at the Budget on 30 October, it will continue to be difficult to advise non-doms with any clarity in the meantime. 

PLANNING POINTS

UK resident non-doms who will be outside the FIG regime

Those who can afford to do so will probably wish to wait until at least after the Budget on 30 October before making any concrete plans.  However, for anyone who will be outside the FIG regime from 6 April 2025, or who will be within the scope of IHT, there may be value in thinking now about what you may wish to do before the end of the tax year, to ensure that you are able to achieve this in good time after the Budget.  For example:

• If this is your final year of being a remittance basis user, you might consider realising FIG now so that you can either retain it outside the UK or benefit from a potentially advantageous tax rate under the TRF for remittances from 6 April 2025. 
• Identify now any foreign assets you may wish to dispose of once we know the date and other details of the rebasing rules following the October Budget.
• Consider if you have foreign assets that you might wish to give away to non-UK based family members to benefit from the current excluded property rules for IHT. 
• Review trusts and other structures from which you could be excluded as a beneficiary to prevent FIG from being attributed to you, or assets being included in your estate for IHT purposes. 

UK resident non-doms who will be within the FIG regime

If it is possible to delay foreign income and gains from arising until after 5 April 2025, this may be beneficial, as any such FIG may be brought to the UK tax free while you are taxed under the FIG regime.  In the case of income, this may be easier to achieve within trust or corporate structures. 

Where this is not possible, those who are currently remittance basis users, or have been in the past, may be able to take advantage of the TRF to reduce the rate of tax they pay on remittances of pre-April 2025 FIG, or the option to rebase for capital gains. In both cases, we will have to wait for the Budget to find out the detail of these transitional arrangements. This would support waiting until after 5 April 2025 to make any remittances.

Individuals planning to come to the UK 

Anyone who is considering coming to the UK either for the first time, or after a period of non-residence of at least 10 years, should take advice in advance to ensure that they take up or resume UK residence as tax-effectively as possible. 

This note provides an overview of the proposed changes to the taxation of non-domiciled individuals as we understand them following the publication of HM Treasury's policy paper on 29 July. We will report further on the new regime as more information is published, and following the Budget on 30 October. 

In the meantime, if you would like advice on how these or other changes may affect you and any trusts of which you are the settlor or trustee, please get in touch with your usual Howard Kennedy contact.