Budget 2024 - Labour’s Love Lost (for Non Doms) – Confirmed
Andy Wood • October 31, 2024
Labour’s Love Lost (for Non Doms) – Confirmed
Introduction
In it, the King and three of his best pals vow to avoid women. In true Shakespearean comedy, there is then a knock on the courtly door, and four women appear, and they fall in love.
Oh, the japes.
It seemed that after declaring their lack of affection for non-doms (following on from the Tories introduction of the destruction of the regime, lest we forget) might be softening in recent comment pieces. It was hardly becoming a love-in, but it seemed to be softening as the real financial impact of the changes.
But, as Shakespeare himself said on Radio 5 Live yesterday, “Alas, t’was not to be”.
You want to hear about the changes? Ok.
Abolition of the Remittance Basis
The main theme of the changes is the abolition of the UK’s long-standing remittance basis of taxation for non-doms.
An early form of this was first introduced by William Pitt the Younger in 1799.
If you think the remittance basis was an odd tax measure, it is worth knowing that Pitt also introduced taxes on servants, horses, non-working dogs, clocks and watches and hair powder.
However, in sum, the current remittance basis of taxation allows those who are non-UK domiciled (under general law) the privilege of leaving their foreign income and gains offshore without paying tax. As soon as they use or otherwise enjoy them in the UK, they then will pay tax on that amount.
Broadly speaking, domicile is a connection with a place which transcends physical presence (which, broadly, is residence). It is often described as the person’s ‘permanent’ home and is usually inherited from one’s father. It is difficult to ‘lose’.
Whether this is unfair or anachronistic is one point. But another is that it could be argued it has been highly successful in bringing internationally mobile wealth to the UK.
However, every dog has its day (or centuries) and it will be scrapped from 6 April 2025.
The New 4 Year FIG Regime
Thrust into this vacuum will be a new regime freshly drafted by the government. This will be a residence-based regime and will take effect from 6 April 2025.
Individuals who elect for this regime will not pay UK tax on foreign income and gains (FIG) for the first 4 years of tax residence.
It should be noted that this will only apply to those who are coming to the UK for the first time or have not been resident in the UK in any of the previous 10 tax years.
For those who became resident for tax purposes in 2022/23, 2023/24 and 2024/25 tax years (ie less than 4 years) they will be allowed to benefit for the regime until they have been resident for the balance of their first four years.
There is no separate charge on bringing those funds to the UK.
This means that those with significant, profitable overseas businesses (such that there wealth and income is outside of the UK) might find they have an opportunity to come to the UK for a period, be quite relaxed about whether they are UK resident and be quite relaxed about what they are bringing into the UK.
However, it should not be forgotten that this will be for a fixed four-year period only.
On the face of it, this looks particularly attractive, for example, footballers, sports persons and entertainers coming to the UK, with significant overseas income from endorsements and image rights. However, one should consider the scope of Draft 854H and “performance income”.
Inheritance Tax (IHT)
As we were told way back in the spring, the intention was not just to the abolition the remittance basis for income tax and CGT.
But also, to break the nexus between IHT and domicile.
This is perhaps a more surgical procedure, as IHT’s main connecting factor is domicile. So, what has the government come up with when it comes to the practical exercise of achieving this?
The appropriate nexus, replacing domicile, will be whether the person is “long term UK resident”.
The definition of a “long term UK resident” is if they have been resident in the UK for 10 out of the previous 20 tax years. For those under 20 years, the definition is slightly different.
As such, there are some advantages in not being such a person. I can hear the expats ears pricking as I write this. So, let’s have a look, eh?
If I have been living in, say, the UAE for over 10 tax years then I know I am not a long-term resident of the UK.
This means that I will only have a UK IHT exposure on my UK assets. Any foreign situs assets will be outside of the scope of UK IHT from 6 April 2025.
Many expats will already be under this understanding already (additionally, many believe they have NO UK IHT exposure at all!) but this would require them to have some confidence in their being non-UK domiciled under general law. The UAE has some difficulties in this regard as one cannot get permanent residence. However, as its unlikely they will have obtained any such confirmation from HMRC, the position is, at best, uncertain.
Under the new rules, there will be greater certainty as residence is an objective test.
For those that have come to the UK, once they have been resident for the 10 tax years, they will have a UK IHT exposure on their worldwide assets.
What about trusts, set up before the new regime, in this context?
Well, this is bad, bad news I am afraid.
At present, where a trust was settled by a non-domiciled (and non-deemed domiciled) individual, and the assets in the trust are foreign situs, then they are excluded property and outside the scope of UK IHT. This is the case even if the person settling the trust subsequently becomes deemed domiciled.
However, the government has confirmed the significant decision to provide no grandfathering where the settlor has become a long-term resident of the UK. This potentially brings significant amounts of wealth back into the UK IHT net.
This might well be a key consideration on whether a wealthy non-dom remains in the UK or decides whether any of their life in the UK can be conducted as a non-resident.
Of course, there will be a lag of up to 10 years before they escape the long-term UK resident designation.
It should be noted, that everyone, wherever they are domiciled, will be exposed to UK IHT on UK assets
– subject to reliefs and capital tax treaties.
These new rules will be effective from 6 April 2025.
Capital Gains Tax – rebasing
As well as the relief for new residents under the FIG regime, there are also changes for those who have previously benefited from the remittance basis regime.
Here, current and past remittance basis users will be able to rebase personally held foreign assets to 5 April 2017.
In other words, rather than the historic cost being brought into account for CGT purposes on sale, the market value of the asset in April 2017 will take its place.
This will generally be beneficial. But if it is not, then one can make an election for it not to apply to a particular disposal.
The Temporary Repatriation Facility (“TRF”)
A pertinent question is what happens to unremitted income and gains that is currently sitting in financial limbo – as, if remitted under the old regime, it would suffer UK taxes.
As a compromise, the so-called TRF was created.
Originally, when Labour announced its TRF, relevant non-doms would be able to remit foreign income and gains that arose before 6 April 2025 at a rate of 12%. This was only to be available in the tax years 2025-26 and 2026-27.
However, the government has announced that it will extending this to 3 years. It will expand the scope to offshore structures to sensible encourage non-doms to being their FIG into the UK.
The rate of tax for first 2 years the rate is 12% and will be 15% for final year. This seems to add unnecessary complexity but, it is assumed, this is to stop people dallying.
In some welcome news for non-doms, the TRF will also apply to distributions from trusts that were designated as protected trusts.
This would seem to be a bonus for those who are looking to extract the previous income and gains of those trusts at a ‘discount.’
Overseas Workday Relief (“OWR”)
At present, if a non-UK domiciled individual moves to the UK, becomes UK-resident, and works part of the year abroad, they can use OWR to exclude their foreign earnings from UK tax for those workdays spent overseas, provided the earnings remain offshore.
The Budget confirmed that OWR will be retained and reformed. It will be extended to a 4 year period (to match the new 4 year FIG regime) and remove the need to keep the income offshore.
The amount of relief that can be claimed each tax year will be limited to the lower of:
£300,000; or
30% of the employee’s net employment income.
Conclusion
So, with the flick of the Bard’s quill, the remittance basis is bade a fond farewell.
Well, not so much a flick of the quill, but heaps of more legislation.
There are some welcome provisions in there, such as the extension of the TRF. However, I feel the lack of grandfathering for trusts and the new IHT regime are a really egregious change. Will non-doms react, as predicted, by exeunt-ing stage left?
To quote Antonio in the opening lines of a Merchant of Venice, “in sooth, I know not why I am so sad”
Curtain.
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April 6th, 2025 marks the beginning of a major shift in UK taxation. Labour’s new tax reforms have officially scrapped the long-standing non-domiciled (non-dom) tax status — a move that targets wealthy individuals who live in the UK but, under the new non dom regime, have been able to mitigate UK tax on their overseas income and gains. This change spells the end of a tax break that attracted many high-net-worth individuals (HNWIs) to the UK and is already causing ripples across the country’s elite financial circles. The message is clear: if you live here, you pay here. Let's break down what has changed. What Was the Non-Dom Tax Regime? The non-dom tax regime allowed individuals residing in the UK, who claimed their primary home (domicile) to be outside the UK, to avoid UK income and capital gains taxes by not bringing any foreign earnings or gains back into the UK. This system made the UK an attractive location for individuals with international earnings. We covered this in more detail here. What Has Changed? Since 2025-26 tax year, the government has implemented several significant reforms. These reforms include: 1. End of Non-Dom Status All UK tax residents will now owe UK income tax on all global income and gains, regardless of whether these were brought into the country or not. 2. Inheritance Tax (IHT) on Foreign Assets Non-doms could previously avoid UK Inheritance Tax on assets they held outside the UK; now individuals who have lived here for more than four years will be liable for IHT on all their global estate assets. 3. Temporary Reliefs To assist the transition, temporary measures include the following: Tax Year 2025-26 will see a 50% reduction on foreign income tax. Capital Gains Tax (CGT) laws allow us to rebase overseas assets based on their value as of April 2019 for CGT purposes. Temporarily, bringing money from abroad may not incur full tax charges upon entering the UK. Why Has the Government Made These Changes? According to Labour, eliminating non-dom status will provide many advantages: Enhance tax fairness Raise extra funds to support public services Close longstanding loopholes used by the wealthy Rising Tax Bills HNWIs with overseas assets and income will now face significantly increased tax obligations that may have an effect on personal finances, family planning and wealth transference. Making Decisions About Moving Abroad Some individuals are already leaving the UK in order to settle in countries with more advantageous tax regimes. Some common destinations for relocation include: United Arab Emirates (UAE) does not levy income or capital gains tax Switzerland provides fixed annual tax arrangements for its most wealthy citizens Italy - flat tax of EUR100,000.000 on foreign income for new residents Monaco does not levy personal income tax for residents Concerns Raised About Impact Within Industry Concerns are being expressed that this could lead to a decrease in: Investment into UK businesses Jobs funded by private wealth Donations to UK Charities What About Entrepreneurs? Many entrepreneurs utilise non-dom status to reduce tax on international business earnings, however, these changes could require: Establishing headquarters or structures outside the UK Reconsider ownership of intellectual property or company shares An investigation of how profits and dividends are managed is important to ensure long-term growth. What Should Be Done Now? If you or those you work with have been affected, taking immediate steps is key to their safety. Here are a few things you can do. 1. Consult With A Specialist Tax Advisor Every situation varies. Seek tailored guidance from someone familiar with both UK and international tax regulations. 2. Evaluate Your Financial Structures Evaluate how you hold assets - for instance through offshore companies or trusts. Any necessary changes must be implemented for optimal efficiency and compliance purposes. 3. Consider Relocating If the UK's new tax rules no longer suit, you might wish to explore living elsewhere where tax liabilities would be lower. Be sure to carefully consider all legal, financial, and family aspects prior to making any decisions. Summary The changes to the non-dom tax regime mark a profound transformation for those who rely on global income and wealth for tax payments, especially those living abroad. Although intended to increase fairness, these reforms also pose challenges to those accustomed to using it. Now is the time to review your plans, secure your assets, and seek professional guidance. How Can We Assist? At our offices in both the UK and UAE, we assist individuals, entrepreneurs and professional advisors in making well-informed decisions. If you have any queries about this article or need advice then get in touch.