One thing is certain: the new Labour government will change the way non-domiciled, UK resident individuals (non-doms) are taxed; but what is less clear, is how.
Advisers are left with a conundrum about what to tell their clients about the steps they should take, so in the following analysis Rosie Todd, Partner, outlines a few key pointers.
What are the likely changes for non-doms?
There are two strands to the proposals linked to domicile:
1. Changes to the nexus between domicile and inheritance tax
This is a much broader change which will affect all taxpayers, not just non-doms. There are very limited details available about this and it is likely that this will be subject to a full consultation. However, it looks like the determining factor for UK inheritance tax will become residence, rather than domicile. There are some interesting questions about how long the residence “tail” should be (the current proposal seems to be a whopping ten years).
2. Changes to the “remittance basis” of taxation
Very broadly, under the current rules, non-doms during their first 15 out of 20 years of UK tax residence can shelter their non-UK income and gains from UK tax. Unless and until they “remit” such amounts to the UK, the foreign income and gains stay outside the UK tax net (known as the “remittance basis” of taxation). Labour have indicated (pre-election) that they would follow the Tories’ plans to scrap the remittance basis from April 2025.
In addition, currently non-UK trusts which have been set up by non-doms have the benefit of advantageous tax treatment. Foreign income and gains arising in the trust are not attributed to non-dom settlors as they may be for domiciled settlors, and most assets in the trust (other than UK residential property) aren’t counted for UK inheritance tax purposes – either in the estate of the settlor or under the usual inheritance tax rules applicable to UK trusts. Pre-election, Labour committed to removing what they see as these “loopholes” applying to non-UK trusts.
What will replace the remittance basis?
The Conservatives (at the Spring Budget) outlined a much shorter replacement window during which foreign income and gains would not be taxed in the UK, even if remitted. This would be available for new arrivals to the UK for their first four years of residence. The Budget also mentioned some transitional provisions including the “Temporary Repatriation Facility” which would give a lower rate of 12% tax on remittances between 6 April 2025 and 5 April 2027 and would allow rebasing of assets to 2019 values. Labour have yet to confirm whether they would implement the Conservatives’ proposals as outlined but have said they will consider “incentives” for inward investment. Given the tight timeline, it is crucial that the new government publishes its plans as soon as possible.
It is also important to realise that, whilst the remittance basis is going prospectively, it is still relevant for historic foreign income and gains – and so non-doms still need to track these.
What should non-doms (and their advisers) do now?
The rules are complex and we don’t have the detail yet. However, it is vital that non-doms understand now what assets they hold and the likely tax implications for them when the remittance basis is “turned off”.
This will include:
- Thinking about whether assets are standing at a gain
- Considering structures which are in place (e.g. offshore trusts) and whether there is scope to make changes
- Looking at how interests might be taxed going forward (e.g. how will relevant double tax treaties apply to foreign holdings)
We are running out of time before the law is likely to change (from April 2025, if the assumptions are correct). Tax advisers in this specialist area are going to be busy and clients shouldn’t delay getting in front of them so that they can start to plan. The key is for non-doms to have a full understanding of what they own and the possible options so that they can act swiftly once the detail is known.
his article was first published in IFA Magazine and can be accessed here.
Rosie Todd