The taxation of non-doms and the upcoming election

[UPDATE 29 JULY 2024: policy statement published. The transitional rule regarding the 50% reduction on tax due on foreign income and gains in year 1 will not be introduced. There will be a review into the Transfer of Assets Abroad and Settlements legislation and further announcements (especially on the impact to trusts) wil be announced at the 30 October 2024 Budget. ]

Following the 2024 Spring Budget, the Government announced that it intends to abolish the tax relief available for non-UK domiciled individuals and introduce in its place, a relief for those arriving in the UK.

However, this legislation was not enacted prior to the announcement of the general election on 4 July 2024. This creates the possibility that the reforms may not become legislation as originally proposed, particularly in the event of a change of Government.  

What are the proposed changes?  

From 6 April 2025, it is planned that it will no longer be possible to claim the remittance basis where you only pay UK tax on foreign income and foreign gains if and when they are remitted to (brought into) the UK.

This will remove the income tax and capital gains advantages for individuals who are domiciled outside the UK, which is most commonly people with those whose parents are from outside the UK, or those who have permanently left the UK.     

It is intended that this will be replaced by a new relief allowing individuals coming to the UK to be taxable only on their UK income and gains for the first four years of UK residence. The availability of this relief will therefore depend on where an individual actually resides (their residence) rather than their family heritage (their domicile).  

What is the effect on non-UK domiciled individuals?  

Non-UK domiciled individuals will no longer be able to claim the remittance basis and will therefore be liable to UK tax on their worldwide income and gains, as opposed to the previous position where foreign income and gains were only liable to UK tax when remitted to the UK.  

However, where an individual has claimed the remittance basis prior to April 2025, there may be unremitted foreign income and gains arising in those years. If this foreign income or gains are remitted after April 2025, the remittance will still be liable to UK tax in the tax year in which it occurs.         

The Government plans to bring in some transitional rules for the 2025/26 and 2026/27 tax years for those who have previously claimed the remittance basis. This includes the following: 

• Remittance basis users would only be liable to UK tax on 50% of their foreign income for the 2025/26 tax year.
• Remittances of foreign income and gains between 6 April 2025 and 5 April 2027 will be subject to a flat tax rate of 12%. 
• The cost of their foreign assets for capital gains tax will be rebased to their value at 5 April 2019, if held at this date.

What are the new rules and who may benefit from these changes?  

The rules, intended to be introduced from 6 April 2025, fall into what is known as the foreign income and gains (FIG) regime.

Under the FIG regime, an individual who comes to the UK (having been a non-UK resident for at least ten years prior to their arrival) will not pay tax on their foreign income or gains for each of the first four years of UK tax residence.  

This creates tax planning possibilities for those coming to the UK.

We would highlight the following in particular:

• The FIG regime will mean qualifying individuals arriving in the UK would not pay tax on foreign income or gains in the first four years of UK residence, regardless of whether the income or gains were remitted to the UK or not. This is more generous than the previous regime, although available for a shorter period of time.   
   
• As the new FIG regime is based on residence rather than domicile, there will be people who can claim under this regime who would not have been able to claim the remittance basis. UK domiciled individuals returning to the UK after a period overseas of ten or more years, will therefore potentially be in a more advantageous position.   
   
• If a non-domiciled individual previously claimed the remittance basis prior to 6 April 2025, they may qualify under the FIG regime if they meet the residence conditions.  This would allow them to remit income and gains arising on or after 6 April 2025 without a UK tax liability.  However, care would need to be taken to ensure that income and gains arising prior to 6 April 2025 were not remitted, as this would still be a taxable remittance (as detailed above).   
   
• Under the FIG regime it may be possible to time capital transactions (such as the sale or gift of non-UK shares or property) to be made within the first four years after arrival in the UK.  In this case, no UK tax would be due, and the sale proceeds could also be brought to the UK with no further UK tax implications.   

What about inheritance tax?

An Individual’s liability to inheritance tax is determined by their domicile. UK domiciled individuals are subject to UK inheritance tax on their worldwide assets, while non-UK domiciled are only liable to UK inheritance tax on their UK assets.  

The Government announced their intention to change this to a residence based system, to bring it in line with the proposed changes to income tax and capital gains tax above. 

However, no further information has been published on this prior to calling the election, so the details of this reform are not yet known.  

Will this affect trusts?  

The proposed changes will affect trusts where either the settlor or a beneficiary is domiciled outside the UK.  

For settlor interested trusts settled by a non-UK domiciled individual, foreign income and gains arising on or after 6 April 2025 will be taxable on the settlor. This will bring the tax position in line with that for UK domiciled settlors.

Under the remittance basis, trust distributions paid to a beneficiary who is non-UK domiciled and claiming the remittance basis are matched to foreign trust income or gains and would only be taxable when remitted to the UK, as with any other source of foreign income. From 6 April 2025, this will no longer be the case, and therefore, they will be liable to UK tax on this income.  

In each of the above cases, the settlor or beneficiary affected may qualify for the FIG regime if they have arrived in the UK in the previous four tax years. Where the FIG regime applies, foreign trust income gains will not be taxable in the UK regardless of whether it is remitted or not.  

New rules are expected to also apply to inheritance tax, which means that foreign assets settled into a trust by a non-UK domiciled settlor on or after 6 April 2025 will be subject to inheritance tax in the UK. Settlements made by non-UK domiciled settlors before this date would not be affected.  

What changes might we expect after the election?

The prospect of a change of Government creates uncertainty and as this legislation has not been approved, any number of changes could be made to the proposals by a new Government formed after the election.  

However, it is understood that Labour broadly supports these reforms and so we would expect the basic principle of these changes (i.e. the move from a domicile-based tax system to a residence-based system) to be implemented.  

Labour has indicated that some elements of the proposed legislation will be changed, and this is anticipated to include the following:

• The removal of the transitional rule allowing those who claimed the remittance basis previously to pay UK tax on only 50% of their foreign income in the 2025/26 tax year.  
• The Government proposals would bring into the scope of UK IHT foreign assets settled into trust by non-UK domiciled settlors on or after 6 April 2025. Labour intends to extend this to assets settled prior to this date.  

In addition, Labour is also believed to be considering the following additions to the rules:

• An incentive to encourage those within the FIG regime to invest in UK businesses, with UK investment being tax free.
• Further methods of encouraging those who previously claimed the remittance basis to bring their unremitted foreign income and gains into the UK, going beyond the 2026/27 tax year.  

As with all legislation not yet passed at the time of a general election, the position is unclear, and the expected amendments are likely to be complicated.

Contact us

If you believe you may be affected by the changes, or you are coming to the UK and may fall under the new regime, please contact your usual Bishop Fleming advisor, or contact Adele Clapp or Dominic Harry from our private client team.