Upcoming Changes to the UK Non-Domicile Tax Regime

The UK Government’s Spring Budget unveiled an end to the non-domicile tax regime, colloquially known as ‘non dom’. This is set to take effect from the 2025/26 tax year. For individuals with international ties, understanding these changes will be crucial for tax planning and compliance.

Paul Webb, Director at Westcotts, outlines the key points of the new rules and provides insights for those potentially affected.

Timeline and Immediate Actions

The changes to the non-domicile tax regime will begin impacting the 2025/26 tax year, but preparation should start much sooner. We recommend addressing these changes during the forthcoming year. This early planning allows clients to leverage transitional provisions that may benefit them and adapt to the altered Inheritance Tax (IHT) landscape.

It’s important to be aware that these changes are proposals and have not yet been legislated. This means details could change. The Shadow Chancellor of the Labour Party has suggested they will not proceed with the transitional provisions. However, what gets stated in the run up to an election does not always proceed once an opponent gains power.

Summary of Non-Domicile Tax Changes Starting April 6, 2025

Non-Domicile Tax for Individuals:

• Non-UK Residents: Individuals who have been non-UK residents for the past ten years will not be taxed on foreign income and gains for the first four tax years upon becoming residents again. These funds can be moved into and out of the UK without triggering tax consequences.
• Loss of Allowances: To benefit from the new regime, a claim must be filed. This will result in the loss of the personal allowance and annual exemption. For high earners this may not matter if they do not get a personal allowance anyway. The annual exemption stands at £3,000, so may not be enough of an incentive to remain outside the new regime.

Non-Domicile Tax for Trusts and IHT:

• Trust Protections Removed: Tax protections for future income and gains in trusts will cease for resident settlors and beneficiaries not covered by the four-year regime.
• Inheritance Tax: The government plans to transition IHT to a residence-based regime which will involve significant changes. This will involve a move to a different system. An individual will become liable for IHT on worldwide assets, once they have been UK resident for ten years. There is a suggestion there will be a ‘tail’ to this in that IHT will continue to be liable on worldwide assets until after ten years of non-UK residence elapses.
• Inheritance Tax for Trusts: It is envisaged that the new rules for chargeability of assets comprised in a settlement will depend upon the settlor meeting the residence criteria or being within the ‘tail’ mentioned above. This will be considered at the time assets are settled and/or when IHT charges such as a ten-year anniversary charge or exit charge arises.

Non-Domicile Tax Changes and Transitional Provisions:

• Remittance Basis to Worldwide Taxation: For 2025/26 only those moving from the remittance basis to worldwide taxation, who are not eligible for the new regime, will pay tax on only 50% of their foreign income.
• Capital Gains: An option to rebase certain overseas assets to their value as of April 5, 2019, will be available, with conditions yet to be detailed.
• Temporary Repatriation Facility: A special tax rate of 12% on remittances of overseas income and gains prior to April 6, 2025, will be available for two years.

Planning for Non-Domicile Tax Changes

Given the complexities and uncertainties surrounding the changes to the non-domicile tax regime, early consultation and strategic planning are essential. Westcotts is ready to assist you in navigating this new regime, assessing individual circumstances, and optimising tax positions. As further details become available and the legislative process unfolds, staying informed and proactive will be key.

The non-domicile tax changes could have substantial financial implications. This is especially for those with significant international financial interests or considering returning to the UK after a period of non-residency. It’s crucial to begin evaluating potential impacts now. Consider engaging with tax professionals to ensure that all aspects of the new regime are managed effectively.

If you have any questions or concerns about how these impending tax changes might impact your personal or business financial planning, contact Paul Webb by email at paul.webb@westcotts.uk or call 01392 288555.