On 6 March 2024, then-Chancellor of the Exchequer Jeremy Hunt announced an overhaul of the non-dom regime. Hunt’s successor Rachel Reeves, has since indicated that Labour will further tighten the rules in her Budget on 30 October.
However, reports now suggest that Labour's proposed changes to the non-dom regime may not be as far-reaching as originally planned, after Office for Budget Responsibility projections revealed the Chancellor's proposals could end up costing the Exchequer, rather than raising revenue. The resulting uncertainty has sparked a series of reports that the UK is set to see an exodus of non-doms in pursuit of more favourable non-dom regimes. For those affected by the forthcoming changes, there are several factors to bear in mind when considering a move away from the UK.
SRT for leavers
While there is little doubt that the Budget will result in changes to the existing regime, it is worth recapping on some existing rules. Indeed, awareness of the statutory residence test (SRT) and domicile will remain important for UK tax purposes for years to come – not only for those that stay, but also for those who leave.
Leavers must understand and manage their "UK ties" under the sufficient ties test in the SRT to avoid inadvertently remaining UK tax resident. In particular, leavers should consider:
- Spending more midnights in their arrival country than in the UK to avoid acquiring a "country tie". As an aside, establishing strong presence in the arrival country could also be relevant if the leaver finds themselves reliant upon a double tax treaty between the UK and the arrival country.
- Keeping a watchful eye on the definition of ‘work’, if continuing some work in the UK. For example, travel to and from meetings counts as work. Leavers may therefore consider combining all UK meetings into one day to reduce the chances of inadvertently working for more than three hours per day on 40 days per tax year in the UK, as this would create a work tie.
- Thinking about their UK accommodation on return trips to avoid creating an "accommodation tie" (even if they've sold or no longer rent a UK home).
- Family members who remain UK tax resident may create a family tie. Sometimes this is unavoidable, but in other cases, planning to manage this tie is important. For example, being vigilant as to the amount of time spent with relatives in the UK and how much time a child in full time education spends in the UK outside of term time.
- Paying attention to the 91-day tie, which can continue to apply for at least the first two years of leaving.
Temporary Non-Residence Rules
Leavers later returning to the UK could fall foul of the Temporary Non-Residence Rules (TNRs). The TNRs are designed to prevent individuals from becoming non-UK resident for short periods of time to take advantage of certain tax benefits. If the TNRs apply, gains realised and certain income received whilst non-UK tax resident can become subject to UK tax when that individual becomes UK tax resident again.
Those considering a move away from the UK should take care not to inadvertently trigger the TNRs, and plan accordingly if they know they will return. In broad terms, if an individual falls within the scope of the TNRs, they should ensure that they are non-resident for more than five calendar years. In practice, this means being non-UK tax resident for at least six full tax years.
Fail to prepare, prepare to fail
HMRC is doubling down on enquiries into UK tax compliance, residence position, and the non-UK domicile status of UK taxpayers. HMRC has one year to enquire into a personal individual’s UK tax return, it can review back up to six years where carelessness is involved, and as many as 20 years, where HMRC believes that there has been dishonesty at play.
Leavers should keep comprehensive records to support their position of non-residence under the SRT. Depending on which aspects of the SRT are being relied on, this may include a day count tracker for midnights spent in the UK; a work calendar detailing UK working hours; or details on where the individual stayed whilst in the UK, together with supporting evidence, such as flight tickets.
Even with a likely shift away from domicile, leavers should ensure their records reflecting their non-UK domicile position are updated before leaving the UK, to be used as contemporaneous evidence in the event of an enquiry. This could involve, for example, preparing a domicile statement outlining intentions as to where the person does (or does not) intend to live permanently or indefinitely and gathering evidence to support those intentions to date.
The devil is in the detail
It remains to be seen precisely what the post-Budget tax landscape will look like. For some, the uncertainty alone will be reason enough to at least consider a move away from the UK. Whilst this may look like an appealing option, strategic planning should be carried out, and legal advice sought, to ensure that common tax residence and domicile pitfalls are avoided.
Please join us on 7 November when we will be discussing the impact of the Budget in more detail.