Reform of Non Dom Rules from April 2025

The newly elected Labour government has committed to eliminating the non-dom tax status to generate additional revenue for the NHS and other public services.

In March 2024, Conservative Chancellor Jeremy Hunt declared that the non-dom tax regime would be phased out. Under his proposal, individuals moving to the UK from April 2025 would be exempt from paying UK tax on overseas earnings for the first four years. After this period, they would be subject to the same tax rules as other UK residents. Current non-doms would have a two-year transition period to integrate their foreign wealth into the UK tax system.

Hunt estimated that ending the non-dom status would generate £2.7 billion annually by 2028/29. The number of individuals claiming non-dom status in the UK has seen a slight increase since the Covid-19 pandemic. According to HM Revenue & Customs, 74,000 people claimed non-dom status in 2022-23, up from 68,900 in 2021-22.

 

What is a Non-Dom?

 

A “non-dom” is a UK resident whose permanent home, or domicile, for tax purposes, is outside the UK. This status pertains to tax obligations and is unrelated to nationality, citizenship, or residency, although these factors may influence it.

Non-dom status can be acquired in two primary ways:

 

a. Domicile of Origin: If you were born outside the UK or if your father was from another country.
b. Domicile of Choice: If you are over 16 and choose to leave the UK to live permanently in another country.

 

Non-doms pay UK tax only on income earned within the UK and are exempt from UK taxes on overseas earnings unless those funds are transferred to a UK bank account. This can result in significant, legal tax savings for wealthy individuals who claim a domicile in a lower-tax jurisdiction.

 

Current Rules for Non-Dom Status

 

Currently, non-doms who opt not to pay UK tax on overseas earnings must pay:

 

a. £30,000 if they have been in the UK for at least seven of the previous nine tax years.
b. £60,000 if they have been in the UK for at least 12 of the previous 14 tax years.

 

Since 2017, non-dom status is no longer available to those who have been UK residents for 15 of the last 20 years, or if the following conditions apply:

 

a. Born in the UK.
b. Domicile of origin was in the UK.
c. Resident in the UK for at least a year since 2017.
d. However, if foreign earnings are less than £2,000 annually and not brought into the UK, no action is required.

 

New Policy Document on Abolishing Non Dom Status

 

On 29 July, the new Labour Government released a policy document confirming they will abolish the tax regime for non-doms and replace it with a new residence-based regime from 6 April 2025.

Starting 6 April 2025, the current remittance basis regime will be replaced with a residence-based test. This new regime will be available for up to four years, commencing either on 6 April 2025 or the first tax year in which the individual becomes a UK resident, whichever is later. During this period, new UK arrivals will not be taxed on their foreign income and gains (FIG) or on distributions from non-resident trusts, which can be brought into the UK without incurring a tax charge. However, those who opt into the four-year FIG regime will forfeit their entitlement to personal allowances and the annual exempt amount for capital gains tax (CGT).

This new regime is only available to individuals who have been non-UK residents for at least the previous ten tax years. However, qualifying individuals who have been UK tax residents for less than four tax years by 6 April 2025 can use the FIG regime for the remainder of the four-year term. After this four-year period, individuals will be taxed on their worldwide income and gains under the standard tax rules applicable to UK residents.

Chancellor Rachel Reeves projected that Labour’s modifications could raise £2.6 billion over the next Parliament.

 

Transitional Provisions for Current Non-Doms

 

For those currently holding non-dom status who will transition from the remittance basis to the arising basis on 6 April 2025, but do not qualify for the four-year FIG regime, there will be some transitional relief available. However, this relief will be less generous than what was proposed by the previous Conservative government. Notably, the new Labour government will not implement the 50% reduction on foreign taxable income for individuals losing access to the remittance basis on 6 April 2025.

A rebasing of foreign capital assets will be provided for certain individuals, with the specific rebasing date expected to be announced in the Autumn Budget on 30 October 2024. Business Investment Relief will remain available.

A Temporary Repatriation Facility (TRF) for FIG that arose to former remittance basis users before 6 April 2025 will be introduced, though the tax rate and duration are yet to be confirmed. The government aims to make the TRF as attractive as possible, and further details, including whether it will extend to stockpiled income and gains in offshore structures, will be disclosed at the Budget.

 

Changes to Non Dom IHT Rules

 

The Government also plans to replace the current domicile-based inheritance tax (IHT) system with a new residence-based system starting 6 April 2025. The primary criterion for determining if non-UK assets are subject to IHT will be whether the individual has been a UK resident for at least 10 years prior to the tax year in which the chargeable event, such as death, occurs, with the provision to keep the individual within scope for 10 years after leaving the UK.

Additionally, the Government will eliminate the use of excluded property trusts to shield assets from IHT.

Further details on the new rules are set to be disclosed in the Budget, which is scheduled for 30 October 2024.

HMRC has launched a website outlining their ongoing engagement plans regarding the changes to the taxation of non-UK domiciled individuals.