The end of an era

Written by Kevin Winters, associate at Brodies LLP

The abolition of the UK’s non-dom regime is in situ from 6 April 2025, but what does the replacement look like?

On 30 October 2024, the UK Government confirmed in its Autumn Budget that the UK’s existing regime for taxing UK-resident, non-domiciled individuals (non-doms) would be abolished from 6 April 2025. The Government has published draft legislation and guidance on how this major shift in tax policy will be implemented, and what the replacement for the non-dom regime will look like.

Why is this important?

The tax regime as it applies to non-doms is distinct, meaning that practitioners (and their clients) will need to adjust and in relatively short order. While the changes will be felt most keenly by existing non-doms, consideration should also be given to how certain announcements, particularly the shift in how the UK will assess liability to Inheritance Tax (IHT) on death, will impact on estate planning more generally.

What happens on 6 April 2025?

In short, April 2025 will see the existing regime for taxing non-doms brought to an end. It will be replaced with a new system which, in broad terms, has the following main features:

1. The end to the remittance basis

All UK resident taxpayers will be taxed on the arising basis, i.e. Income Tax (IT) and Capital Gains Tax (CGT) will be applied to worldwide income and gains. If a taxpayer is ‘new’ to the UK in that they:

• are in their first four years of UK tax residence; and
• have been a non-tax resident in the UK for 10 consecutive years,

then they may opt to use the new Foreign Income and Gains Regime (FIG regime). Thereunder, taxpayers will be able to remit FIG to the UK with 100% relief from UK tax, with FIG having potentially been subject to tax in the jurisdiction where they arose. Even if the FIG has not been taxed at source, if remitted to the UK under the FIG regime, no IT or CGT is anticipated to be due.

A point of detail is that the FIG regime only applies to the first four years of UK tax residence after 10 years of non-residence, i.e. if a taxpayer leaves the UK on a short-term basis within those four years, they will only be able to use the time remaining within those first four years to benefit from the FIG regime. Therefore, a taxpayer needs to meet both (i) and (ii) above to use the FIG regime.

Consideration will need to be given for FIG arising in settlor-interested trusts (and similar structures). The Government’s announcements will lead to the existing protections of FIG under the Settlements and Transfer of Assets Abroad rules will be removed from 6 April 2025, meaning that all income and gains arising in such a structure (or underlying company) may be assessable on the settlor/transferor unless they can make use of the FIG regime.

2. A temporary repatriation facility (TRF) for users of the remittance basis

As mentioned earlier, April 2025 will see the end of the remittance basis of taxation. That could, understandably, cause current remittance basis users to question what they are to do with FIG that has not been subject to UK tax, but which they intend to bring to the UK.

Where remittance basis users are not able to use the FIG regime mentioned at 1., they may be able to use the TRF whereby they can remit FIG not previously taxed in the UK – owing to a claim to be taxed on the remittance basis being filed with HMRC – at a fixed rate of tax. FIG appropriately designated and brought to the UK using the TRF will be taxed at 12% from tax years 2025/2026-2027/2027, increasing to 15% in tax year 2027/2028 (the TRF charge). It is important to note that the TRF will only be available for three tax years from 6 April 2025.

Remittance basis users may currently be subject to the higher rate(s) of IT and CGT on their UK income and gains, and could be liable to an increased sum in tax following the abolition of the remittance basis – their global income and gains will be subject to UK (and potentially foreign) tax. Under the TRF, the UK Government will permit taxpayers to bring foreign wealth into the UK at a relatively modest tax charge, which is significantly less than most of the higher rates of IT and CGT that they would otherwise be liable for. However, there are two points to note:

• FIG which is capable of being brought to the UK under the TRF may have already been subject to tax at source.
• There will be no scope to offset foreign tax paid against the TRF charge.

It will ultimately be a matter of judgment as to whether or not it makes economic sense to use the TRF, depending on client intentions.

3. The adoption of a residence-based system of IHT

IHT can, as is known, be chargeable in several different instances. For the purposes of this article, the focus will be on the liability of estates to IHT on death.

Non-doms are generally not currently subject to IHT on their foreign assets on death, provided they are not deemed domiciled in the UK on death.  The question of whether or not IHT will be due on foreign assets held by non-doms on death will, from 6 April 2025, depend on whether or not the deceased had been a UK resident for at least 10 of the last 20 tax years immediately preceding that tax year in which they die (a Long-Term Resident). A taxpayer will retain their status as a Long-Term Resident for as long as they remain tax resident in the UK and for a period having ceased UK tax residence – the length of time that they remain Long-Term Resident will depend on how long they were tax resident in the UK, but the so-called IHT ‘tail’ can last for as long as 10 years after a Long-Term Resident ceases to be UK tax resident.

Note that there are distinct tests for those that die under the age of 20 years old and corporate bodies. Residence for tax purposes is assessed using the Statutory Residence Test. For assessing residence for tax years prior to 6 April 2013, other rules will be relevant.

What does this mean for trusts?

The UK’s shift in approach to the taxation of non-doms, specifically the adoption of a residence-based system of IHT, is relevant to Excluded Property Trusts (EPTs). Currently, EPTs – trusts created and which received qualifying assets while the settlor was non-UK domiciled – are generally outside the scope of IHT.

From 6 April 2025, the position will change. The IHT treatment of EPTs will depend on the settlor’s residence on death, i.e. if a taxpayer establishes an EPT prior to becoming a Long-Term Resident, and later dies having become a Long-Term Resident, the assets in the trust will be within scope for IHT. There are distinct rules for liferent or ‘Interest in Possession’ EPTs. Excluded Property Trusts will only offer IHT advantages provided they were established while the settlor was not a Long-Term Resident. If a non-dom settlor of an EPT dies before 6 April 2025, the current treatment of Excluded Property Trusts will continue to apply.

The shift in approach to IHT will have consequential changes for Relevant Property Trusts involving non-UK relevant property. Whether or not the settlor is a Long-Term Resident on 6 April 2025 will determine if exit charges will be due or not.

Will there be transitional rules?

Inevitably, there will be taxpayers that fall ‘between the cracks’. The UK Government has indicated that there will be transitional provisions put in place to ease taxpayers’ adjustment to the new regime. These are beyond the scope of this article but are included in the guidance referred to above and will need to be worked through.

What does this mean for advising clients?

There is a significant amount of detail to be digested in light of the UK Government’s announcements. In general terms:

• Non-doms are not strangers to change – the UK’s approach to taxing non-doms has been subject to development over an extended period of time. This is, perhaps, the most pronounced change that they have had to grapple with and there is limited time to adjust their affairs accordingly. There would be merit in a detailed discussion with clients, setting out what these changes mean for them and considering their long-term intentions.
• The move to a residence-based IHT regime, arguably, brings more clarity when estate planning is concerned for clients more generally (not exclusively non-doms). The SRT is more definitive than the concept of domicile but can be challenging to apply in practice.

Written by Kevin Winters, an associate at Brodies LLP, specialising in estate planning, taxation and cross-border advice.