The non-domicile (Non-Dom) status has been a distinctive characteristic of the United Kingdom (UK) tax system for many years, offering a favorable regime for certain individuals. The previous Conservative UK government announced their intention to abolish this regime and to harmonize UK tax resident individuals’ taxation on the basis of their worldwide income and gains, a proposal that the new Labour UK government has confirmed that it will be taking forward, albeit with some modifications.
What is the current Non-Dom status?
Generally, individuals who are UK tax resident are subject to UK tax on their worldwide income and gains. The Non-Dom status currently allows individuals whose place of “domicile” is outside the UK to make a claim to be taxed in the UK on the “remittance basis”. This allows them to be taxed on their UK source income and gains, but only taxed on their non-UK source income and gains to the extent that they are remitted to the UK. This status could last for up to fifteen years, before individuals become “deemed domiciled”. In addition, certain annual charges are applicable in some circumstances in order to make a claim for the remittance basis of taxation.
The proposals
The proposals for changes to the taxation of non-UK domiciled individuals were announced at Spring Budget 2024. Following the UK General Election on 4 July 2024, the new Labour government published a policy paper on 29 July which amended a number of details of the original proposal. Confirmation on a number of areas is expected on 30 October when the UK government delivers its Budget.
While we do not have draft legislation, the policy paper is clear that with effect from 6 April 2025, the Non-Dom status will be abolished for income and capital purposes. Instead, under current proposals individuals who come to the UK for the first time after this date would have a four-year transitional period and will then be taxable on their worldwide income and gains. In the first four years, they would not be subject to UK tax on foreign income and gains (FIG) even if remitted to the UK.
The proposed four-year FIG regime for new residents is designed as a strategic measure to facilitate a smooth transition into the UK’s tax environment. After this period, the tax system would treat all residents uniformly, taxing worldwide income and removing the distinction between domiciled and non-domiciled individuals.
In addition to the changes to the taxation of income and capital, there will be stakeholder engagement to consult on the impacts of the removal of the domicile concept from a UK inheritance tax perspective.
Impact on existing Non-Doms
Non-Dom individuals who are already tax resident in the UK may be able to benefit from the FIG regime for a proportion of the four-year period, depending on when they first became resident in the UK. To encourage remittance of historic FIG, there may be a temporary repatriation facility (TRF), allowing FIG earned personally to be remitted at a reduced rate and the government is considering whether to extend this to income and gains withing non-UK structures. The original proposal was for the reduced rate to be 12 percent and for the TRF to apply to 2025/2026 and 2026/2027 but the rate and timescales are now under review. The position for trusts is complex. Current and past remittance basis taxpayers may be able to elect to rebase certain assets that are personally held. It had originally been suggested that rebasing would be to April 2019 values but this is now under consideration and will be confirmed at Budget on 30 October. It has been confirmed by the current government that the policy previously announced (by their predecessors) providing a fifty percent reduction in non-UK income subject to tax in 2025/2026 will not be introduced.
Conclusion
The proposed abolition of the current Non-Dom tax regime marks a significant shift in the UK’s fiscal framework. In addition, the shape of the reform of the UK inheritance tax regime will be closely watched, particularly by those affected by the changes to the Non-Dom regime in relation to income and gains. Those affected by the proposals are recommended to seek expert tax advice and should consider the implications for their personal tax situation, on a case by case basis. What is yet to be seen is how individuals react to these changes; it is clear many are looking at their plans and considering whether the many advantages of London outweigh the tax costs. For some, the real issue may be the proposed inheritance tax changes; time will tell.
Julia Lloyd is partner at Norton Rose Fulbright LLP. Inès Niot is associate at Norton Rose Fulbright Luxembourg SCS. The firm is a member of the Investment Officer’s expert panel.