houses in residential street

Abolition of the non-dom regime - Where are we now?

Mark Spalding, Director, Private Clients
houses in residential street
In their spring Budget in March 2024, the Conservative government proposed some significant changes to the existing long-standing regime for taxing non-UK domiciled individuals (non-doms) intended to take effect from 6th April 2025. Read our earlier article, ‘Abolition of non-dom regime’. There has been very little additional detail on the proposed changes since and the whole process has been on hold in the run-up to the General Election on 4 July 2024. In this article we look at the likely impact of the new government on the non-dom changes previously proposed and suggest some planning points for consideration pending further detail on the changes being published.

The Labour Party manifesto pledged to “abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period”, and “end the use of offshore Trusts to avoid Inheritance Tax so that everyone who makes their home here in the UK pays their taxes here”, but gave no further indication of how this might be achieved.

However, it is well-known that the Conservative proposals were largely based on original Labour policy. Given that Labour had previously announced their intention to implement changes to the some of the Conservative proposals, we expect Labour to largely implement the proposals as announced by the Conservatives, subject to some specific changes.

  • To not proceed with the 50% reduction in foreign income subject to tax in 2025/26 for those who lose access to the remittance basis on 6 April 2025 and are not eligible for the UK Foreign Income and Gains (FIG) regime.
  • To remove the existing Inheritance Tax (IHT) exemption for non-UK assets settled into a trust by a non-UK domiciled settlor prior to 6 April 2025, such that trusts will no longer qualify for the exemption, whenever settled.
  • A proposed extension to the FIG regime to additionally exempt UK investment income, but with no further detail.
  • Consideration of a possible extension to the temporary repatriation relief beyond 5 April 2027, again with no further detail.

Labour has indicated that there will be no emergency Budget or similar fiscal event in the immediate aftermath of the Election, with most commentators suggesting that we might not see draft legislation on the changes until October or November 2024. In the absence of any indication of an extension to the originally proposed implementation date of 6 April 2025, this leaves a relatively small window for those affected to plan for the changes.

We would not advocate implementing any planning until the detail of the proposed changes is known. As with any tax law the devil is in the detail. However, we would certainly recommend that clients consider the implications of the proposed changes based on what we currently know and consider what solutions may be appropriate, in order to be ready to implement that planning assuming no further changes when the legislation is published.

Possible planning options

Those coming to the UK

  • Manage day counts by reference to the Statutory Residence Test to avoid becoming UK resident at all.
  • Delay arrival until after 5 April 2025 to maximise the 4-year FIG period.
  • Relocate to the UK as early as possible in the year of arrival, to maximise the FIG period in that year.
  • Keep investments offshore for the first four years of residence, so any income and capital gains are foreign source and qualify for the FIG regime (subject to any extension of the regime to include UK investment income).

Current remittance basis users

  • Advance the realisation of foreign income and gains in the current year (ending 5 April 2025) and claim remittance basis to shelter these from UK tax.
  • Defer remittances in the current year until after 5 April 2025 to be able to take advantage of the Temporary Repatriation Facility (TRF) at a lower tax cost (12% based on current proposals) in 2025/26 and 2026/27.
  • If funds are remitted under the TRF, consider the use of a Family Investment Company to hold investments, so Corporation Tax rates apply.
  • Operate separate accounts to avoid mixing pre-and post-April 2025 income and capital gains.
  • Consider whether deferring disposing of assets held on 5 April 2019 until after 5 April 2025 might be appropriate to take advantage of rebasing of those assets to their value on 5 April 2019, thus reducing the level of gains or generating losses.

Resident fewer than 10 years

  • Lose UK tax residence before 10 years of UK tax residence to avoid IHT on foreign assets while resident and to avoid the 10-year IHT tail applying after losing UK residence.

Long-term residents (15+ years) who are deemed domiciled

  • Defer remittances in the current year until after 5 April 2025 to be able to take advantage of the TRF.

Long-term non-residents

  • Individuals (including UK doms) who have not been resident in the UK for at least 10 years can resume residence after 5 April 2025 and take advantage of the four-year FIG regime.

Existing settlor-interested Trusts

  • Consider excluding the settlor (and spouse) from benefit to avoid the attribution of Trust income and gains to the settlor from 6 April 2025.
  • If the settlor still requires access to Trust funds, consider whether the existing Trust can settle a new Trust out of the existing Trust fund, and excluding the settlor (and spouse) from benefitting from one of the Trusts.
  • Consider the investment strategy and the use of offshore bonds or other such investment wrappers to minimise any attribution of trust income and gains to the settlor.
  • Distribute income and gains to non-domiciled remittance basis user beneficiaries by 5 April 2025. These can remain offshore tax-free or remitted to the UK at a lower tax cost of 12% after that date using the TRF.

Should I settle a new Trust before 6 April 2025?

  • If Labour follows through on its intention to remove the IHT exemption for non-UK situs assets held in a Trust, the Trust will be ineffective as an IHT shelter.
  • If the Trust is settlor-interested, Trust income and gains will be attributed to and taxed on the settlor.
  • However, a newly UK resident settlor would be able to take advantage of the FIG regime to avoid UK tax on Trust income and gains attributable to him in his first four years of residence.

We will continue to monitor and update clients on any further information and its potential implications as and when this becomes available. In the meantime, to discuss any of the above in more detail please contact Jennifer McNally or your usual Crowe contact.

Contact us

Jennifer McNally
Jennifer McNally
Partner, Private Clients