Following Labour’s landslide election win, the tax treatment of UK resident but non-domiciled taxpayers (‘non-doms’) will change. Both Labour and the Conservatives promised significant changes in their manifestos, on which there was much common ground.
Existing regime
The default position for a UK resident taxpayer is that they are taxed on the ‘arising basis’, i.e. that any income and gains arising to them anywhere in the world are subject to UK income or capital gains tax.
Non-doms who are UK tax-resident can instead choose to be taxed on the ‘remittance basis’. This means that non-UK income and gains are not taxed in the UK unless brought into (i.e. remitted to) the UK. This option is free for the first seven years of residence, costs £30,000 for years 8-11, £60,000 for years 12-14, and then is no longer available once a non-dom has been UK resident for more than 15 of the previous 20 tax years. At this point, they are treated as ‘deemed domiciled’ for UK tax purposes.
When approaching this deadline, many non-doms choose to set up a non-UK ‘excluded property’ trust from which they are able to benefit, but which places their non-UK assets outside the scope of UK inheritance tax.
- Property held in an excluded property trust remains outside the scope of IHT even if the settlor is still able to benefit and becomes deemed UK domiciled so long as the trust’s assets remain outside the UK.
- These rules take precedence over the ‘Gift with Reservation of Benefit’ rules applicable to UK-domiciled individuals. For those with a UK domicile, property will still be considered part of their estate for IHT purposes if it is transferred to a trust but the donor retains some benefit.
New regime
Labour matched the Conservatives’ March 2024 proposal to abolish the remittance basis in favour a new ‘foreign income and gains’ regime (FIG). According to the technical note from April (which is of course subject to change):
- From 6 April 2025, the new FIG regime will mean that non-doms have four years following arrival in the UK in which they will not pay UK tax on their foreign income and gains. They will also be able to remit global funds to the UK tax-free within those four years.
- Those who choose to be taxed under the regime will lose their personal allowances, currently £12,570 for income and £3,000 for capital gains.
- After the four-year period has elapsed, non-doms' worldwide income and gains become fully subject to UK tax as they arise.
- For non-doms already UK resident for more than four years, Jeremy Hunt’s transitional proposals (which Labour are yet to comment on in detail) were that:
- For 2025/26, only 50% of foreign income would be taxed (but that it would be fully taxable from 6 April 2026). Labour’s manifesto contained a promise to remove the ‘non-dom discount loophole’ which may refer to this, in which case this relief may not be available.
- For two years (2025/26 and 2026/27), any pre-6 April 2025 FIG remitted to the UK would be taxable at a special rate of only 12% (but be fully taxable if remitted on or after 6 April 2027); and
- A capital gains rebasing will be available for non-UK assets held on 5 April 2019 to non-domiciles who have previously claimed the remittance basis and who are still non-UK domiciled or deemed domiciled by 5 April 2025.
- The detail on this remains sketchy and is expected to be subject to consultation. As things stand, the proposal is that non-doms’ worldwide assets would become subject to IHT after ten years of UK residence. For people leaving the UK, IHT would continue to apply for ten years after their departure.
- From 6 April 2025, the current protections from tax on income and gains held within trusts in which the settlor retains an interest will be removed, other than for those qualifying for the four-year FIG period.
- FIG arising in such trusts will be taxable as it arises on a UK resident settlor.
- Any pre-6 April 2025 FIG will continue to be taxable on the current ‘matching’ basis when distributed (although distributions outside the UK can no longer be shielded from tax by the remittance basis).
- Labour have said that the IHT protection given to excluded property trusts (i.e. trusts set up using non-UK assets while the settlor was non-UK domiciled) will cease to be available if a UK-resident settlor retains an interest, as is common.
- Before the election, Rachel Reeves was clear that no ‘grandfathering’ for trusts set up before April 2025 would be available. This proposal has already been subject to considerable lobbying as it brings many excluded property trusts within the scope of IHT and is likely to be a key factor for any non-doms considering whether to remain in the UK.
- In the period before 6 April 2025, UK resident non-doms should look at their options particularly concerning any trusts they may have set up. Even if consultation means that IHT is not applied to existing trusts in full, the treatment is likely to be less generous than that currently on offer.
- Any current remittance basis users should also look at whether they have income/gains that should be remitted in a transitional period, although it is not certain what Labour will offer in that regard.
- Non-doms should take advice as to their choices, but be wary of acting too hastily: it is possible that the Labour government may look at comparable overseas regimes (such as those in Italy and Portugal) and look to include further measures to attract investment into the UK
- There has been no suggestion that Business Investment Relief (BIR) will be altered. For those wishing to bring money to the UK for investment purposes but which would otherwise be subject to tax on being remitted, this remains a useful relief that enables non-UK income and gains to be used in the UK when they might otherwise be left offshore.
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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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