The Treasury published its latest policy paper on the proposed reform of the UK taxation of non-UK domiciled persons (non-doms) on 29 July. The Labour Party, while in opposition, had already responded to the previous Government's original announcements. Whilst the latest announcements confirm or refine some points, others are left open-ended. Crucially, we still await draft legislation to be able to advise non-dom clients with certainty on their tax exposure from 6 April 2025 onwards.
What has been confirmed?
The paper confirms the new Government's commitment to the core framework of the policy of its predecessor:
- The intention remains to introduce all the changes with effect from 6 April 2025, notwithstanding that no draft legislation has yet been published.
- The remittance basis of taxation will be abolished. Instead, new arrivers to the UK will be exempt from UK tax on their non-UK income and capital gains for their first four years of UK residence. 10 consecutive years of prior non-UK residence will be required to be eligible for the new regime. This suggests that even one year of UK residence, inadvertent or otherwise, at any time in the previous 10 years will deny the four-year exemption.
- Trusts settled by non-doms and from which they (or certain family members) may benefit will cease to provide protections from income tax and capital gains tax unless the settlor is within the four-year arrivers regime.
- Inheritance tax (IHT) will move from a domiciled-based system to a residence-based system. A person's non-UK assets will come within the scope of IHT if they were UK resident for the 10 years preceding the chargeable event (including death), and will remain subject to IHT for 10 years after they cease UK residence. There is still little detail about how the 10-year requirement will be measured.
- Trusts settled by non-doms will no longer provide continuing IHT protection. There will be some transitional arrangements for pre-existing trusts, although – given Labour's response to the proposals before they came into power - these are not anticipated to be anywhere near as broad as the originally-announced 'grandfathering' of all trusts settled before 6 April 2025.
What has changed?
Some features of the new regime will vary from the original announcements:
- A transitional rule providing that individuals previously eligible for the remittance basis but not eligible for the new four-year regime would only be subject to UK tax on 50% of their non-UK income in 2025/26 will no longer be introduced.
- It was originally announced that a non-dom's personal assets could be re-based to their 5 April 2019 value when calculating the gain on a post-6 April 2025 disposal. The Government is now re-considering the appropriate re-basing date. "Current and past remittance basis users" will be eligible for re-basing: this could mean that an individual who is UK resident and not yet deemed domiciled but who has never previously claimed the remittance basis (because, for example, they rely on a double tax treaty to mitigate their exposure to UK taxation or have historically had little or no unremitted non-UK income and realised gains) may wish to consider claiming the remittance basis in the current 2024/25 tax year in order to qualify for re-basing.
- A temporary repatriation facility (TRF) will be available to encourage individuals who have previously claimed the remittance basis to remit pre-2025 non-UK income and realised gains to the UK, although its duration and the rate of tax remain to be decided. (Originally, it was announced that the TRF would apply for two years, with such remittances taxed at a reduced rate of 12%, instead of up to 45% for income and usually up to 20% for capital gains.)
- Whereas originally the TRF would only apply to personally-held income and gains, the Government is exploring the possibility of expanding the TRF to income and gains within non-UK structures (such as trusts).
- The originally-announced public consultation on the new IHT rules will no longer take place, replaced by a plan for stakeholder engagement on the operation of the new rules. It had been stated that the consultation would include consideration of "other connecting factors" in addition to residence: it is to be hoped that this suggestion has now been abandoned in favour of the simplicity and clarity provided by a system based solely on residency. This may offer opportunities for long term British ex-pats to return to the UK and still benefit from certain tax advantages.
What is new?
The latest paper also announces for the first time a review of offshore anti-avoidance legislation, including the transfer of assets abroad regime and the settlements code (both of which include provisions regarding the taxation of non-UK trusts, companies and similar structures with a UK connection, but which might otherwise fall outside the scope of UK taxation). The rules are notoriously complex so the stated aims of "remov[ing] ambiguity and uncertainty" and "mak[ing] the rules simpler to apply" can only be welcomed. The challenge will be making such changes in a way which does not leave loopholes or result in the inadvertent taxation of structures with minimal connection to the UK. No changes resulting from this review are anticipated to take effect before 6 April 2026, which is perhaps an indication of the size of the task.
What next?
Further details of many of the changes are promised in the Autumn Budget, which has now been scheduled for 30 October 2024. Taxpayers already in the UK or considering moving here will want to see draft legislation as soon as possible in order that they may plan their affairs with certainty.
The Government has reiterated its desire to introduce a regime which is "internationally competitive and focused on attracting the best talent and investment to the UK". The changes in relation to the TRF in particular suggest that the Government is keen to remove tax disincentives to UK investment, which are inherent in the existing non-dom tax regime. It remains to be seen whether a four-year exemption for non-UK income and gains will be sufficient to attract the best talent to the UK at all, and whether the prospect of 10 years of IHT exposure after ceasing UK residence will encourage those who do come to pack their bags by their ninth year.