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In with a Labour Government and out with the non-dom regime

Posted on 5 July 2024

As widely predicted by the polls and the media, the Labour Party won the 2024 general election, bringing an end to 14 years of Conservative Government. Whilst this clearly has far reaching implications in almost every area of policy, how will it affect the personal tax treatment of international individuals who invest and reside in the UK?

Background

Historically, individuals who were not originally from the UK were able to access a more favourable basis of taxation known as the "remittance basis" whereby, broadly, they were only taxed on foreign income and gains that they brought or "remitted" to the UK. Their foreign assets also remained outside of the UK inheritance tax net as long as they remained non-UK domiciled or "deemed domiciled". Foreign assets settled into trust also broadly remained outside of the scope of inheritance tax.

The abolition of the non-dom regime was somewhat of a fait accomplis given both parties' pledges to do so in the run up to the election. However, whilst Labour confirmed that they "support most aspects of the proposed replacement to the non-dom rules" previously announced by the Conservative Government, they also seek to close what they see as significant "loopholes" in that plan. We have summarised the key changes briefly below, but for a more in-depth summary please see the update we published in June.

The changes

The following changes are planned to take effect from 6 April 2025:

  • Abolition of the remittance basis: The remittance basis will be scrapped. Individuals will instead have a four year window in which they can bring foreign income and gains into the UK tax-free before becoming subject to UK tax on their worldwide income and gains after their fourth year of tax residence.
  • Changes to inheritance tax: Domicile will no longer be the main connecting factor for liability to inheritance tax. Instead, it is proposed that inheritance tax will automatically apply to an individual's worldwide estate after their 10th year of UK tax residence, with a 10 year "tail" for such individuals who subsequently leave the UK.
  • Closing the trust "loophole": Labour have said they will "include all foreign assets held in a trust within UK inheritance tax, whenever they were settled", rejecting the "grandfathering" for pre- April 2025 trusts settled by non-UK domiciled settlors that the Conservatives offered. This essentially means that all trusts settled by UK resident settlors will be within the scope of UK inheritance tax after the settlor has been UK resident for 10 years, regardless of when the trust was settled.
  • Transitional reliefs: Labour will consider investment incentives during the four year window to encourage more investment into the UK. They will also explore ways to encourage individuals who formerly claimed the remittance basis to remit foreign income and gains to the UK. However, they have not given specifics on how they would do so.

These changes signal a fundamental shift in the way in which non-doms are taxed in the UK. There is still a lot of work to do in finalising the details, and the new Labour government will need to strike a balance between effectively taxing non-doms whilst not deterring those who would drive investment and growth by moving to the UK. 

Who will benefit from the abolition of non-doms?

  • UK expats: One of the most surprising beneficiaries of the new regime, are so-called "returning doms" i.e. individuals who are originally from the UK who return after a significant period of absence. Under the proposed new rules, it seems that such individuals can benefit from the four year tax-free window for foreign income and gains after they return to the UK, and their foreign assets will fall outside of the UK inheritance tax net after 10 years of non-residence. This could be good news, for example, for grandparents who have been overseas for some time but want to return to spend time with their younger relatives. British expats who are living outside of the UK long-term also benefit from a system where residence, rather than domicile is the main connecting factor for inheritance tax. Such individuals would be able to implement estate planning with far more certainty on the tax outcome than they currently can under the present domicile based system.
  • Short term UK residents: The four year period is also, in some ways, more generous than the current system, at least in the short term. Short term UK residents can essentially remit any amount of their foreign income and gains to the UK free of tax, which is significantly more generous than the current system.
  • Trusts with non-resident or deceased settlors: The proposed changes also do not appear to significantly affect trusts where the settlor is already deceased or is non-UK resident. UK resident beneficiaries may be subject to UK tax on trust distributions outside of the UK if they fall outside of the four year window, but otherwise the foreign assets of such trusts remain outside of the UK tax net. Ironically, under the changes as currently proposed, a trust previously settled by a UK domiciled settlor (and therefore currently subject to UK inheritance tax charges) would now fall outside of the UK inheritance tax net after the settlor has non-UK resident for at least 10 years.

Conclusion

The new Labour Government will no doubt be busy over the next few months clarifying and tightening up these proposals, especially if they are to honour the April 2025 implementation date. In the spirit of change, we are expecting the promised consultation papers on the proposed changes to how international individuals are taxed to inheritance tax from the Government in the next few weeks. Those affected by the rule changes will be considering their next moves very carefully, but there will inevitably be a period of uncertainty as the Government works on the detail. The worst case scenario is that the current regime is scrapped in 2025 with insufficient detail on the new rules, leading to widespread uncertainty. Hopefully there will be more clarity between now and the Autumn Budget.

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