The beginning of the end for UK resident "non-doms"?

22 April 2024. Published by George Smith, Partner and Ben Simmonds, Associate

As part of the 2024 Spring Budget, the government announced its intention to abolish the tax policy for resident non-UK domiciled individuals (RNDs). In replacement of the current policy, the government is planning to introduce a tax system based on residency which will bring tax rules for RNDs in line with the tax rules for UK registered taxpayers.

The government has said that the changes will apply from 6 April 2025, but this will be subject to the enactment of the legislation implementing these changes, which looks uncertain given the forthcoming general election. The Labour party has, however, also expressed its intention to make changes to the RND policy and so, either way, it seems likely that a new set of rules for professional advisers to get to grips with is on the horizon.

The remittance basis taxation regime (the current regime)

Under the current regime, RNDs are able to elect to pay tax on the remittance basis.  On this basis they pay tax on UK income and gains in the same way as UK domiciles, but only pay tax on foreign income or gains (FIG) when it is remitted (i.e. brought into the UK).

The current scheme is a preferential tax regime for those individuals who generate income and gains outside of the UK and are not deemed as domiciled within the UK, but who reside in the UK. The proposed changes to the regime, as set out below mark a change to that, but with the offer of what is described to be a much simpler system of taxation.

The proposed changes

The 2024 Spring Budget announced that on 6 April 2025, the remittance basis of taxation will be abolished and replaced with a new system of taxation - described by the government as a "modernised regime that is simpler and fairer."

Broadly, the changes abolish the preferential tax treatment based on domicile status for all new FIG arising from April 2025.  RNDs' income and gains arising outside the UK will, subject to transitional protections, thereafter generally be taxed in the same way that a UK taxpayer residing in the UK would be taxed on income and gains generated within the UK.

Key changes as set out within the Spring Budget include as follows:

  • To sweeten the deal for individuals benefiting from the current regime, the government has included a four-year exemption regime in relation to FIG.

During the period of transition, qualifying individuals (new UK tax residents following 10 years of non-UK residency, and those who have been tax resident for fewer than four years) will not pay tax on FIG for the first four years after becoming a UK tax resident and, during this period, they will be able to bring income and gains into the UK free from additional charges. Throughout this period, tax will also not be chargeable on non-resident trust distributions either.

  • Existing RNDs who are not qualifying individuals and who will lose access to the remittance basis on 6 April 2025 will pay tax on only 50% of foreign income (but on 100% of gains) arising during the 2025-26 tax year.
  • Rebasing of capital assets to 5 April 2019 levels for disposals that take place after 6 April 2025 for current RNDs who have claimed the remittance basis.  This means that, when the foreign assets are disposed of, affected individuals can elect to be taxed only on capital gains since that date.
  • RNDs will be able to remit foreign income and gains that arose before 6 April 2025 to the UK at a rate of 12% under the Temporary Repatriation Facility in the tax years 2025-26 and 2026-27.
  • The government is removing protections on non-resident trusts for all new FIG that arises within them after 6 April 2025.  FIG that arose in protected non-resident trusts before 6 April 2025 will not be taxed unless distributions or benefits are paid to UK residents who have been in the UK for more than 4 years.

Individuals who currently benefit from trust structures to protect their FIG will therefore no doubt be concerned with what alternative options are available in order to minimise their potential UK tax liabilities.

  • The government has also said that it plans to consult on and introduce changes to the inheritance tax regime. The current regime is a domicile-based regime and, whilst the proposed changes are yet to be finalised, the government has set out its intention to change to a residence-based regime.

Potential impact for professional advisers

The proposed changes will mean that many individuals who currently benefit from the favourable treatment prescribed by the current regime are facing the prospect of a significant increase to their tax liabilities on their FIG. These individuals will no doubt look to professional advisers for ways to reduce their potential tax liabilities.

As set out above, following any applicable transitional period, current RNDs will be treated in the same way as any UK resident taxpayer. In the longer term, with this proposed simplification of the RND regime, the changes may result in a decrease in complex work for existing tax advisers.

However, in the more immediate term, and while transitional provisions are in effect, RNDs are likely to require professional advice on how best to protect their positions.  This may include time-critical advice on the remittance of foreign income and the repatriation of funds more generally.  RNDs may also require advice on whether to rebase foreign assets.  The transitional provisions may also result in additional funds being brought into the UK, with the result that RNDs will require advice as to the management and investment of these funds.  Further, as ever with significant legislative changes, professional advisors will also have to ensure that they stay on top of the reforms, and ensure that they update their practices and advice as appropriate, in order to continue to comply with their professional duties.

It is not difficult to foresee that significant changes to a complex existing regime, combined with a number of transitional measures, and individuals with complex financial affairs, risks incorrect advice being provided, which may ultimately lead to complaints and claims against professional advisers and liabilities for those professionals and their Insurers.

Given that it will more often than not be HNW individuals who are impacted, incorrect advice may lead to significant tax liabilities and so both professional advisors and Insurers will want to bear that in mind, particularly when considering policy renewal, the scope of cover, and the appropriate policy limit of indemnity.

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