After a long and much-speculated wait, the Chancellor of the Exchequer, Rachel Reeves, presented to Parliament on 30 October the Autumn Budget and draft legislation to implement the announced measures.
Although we still have to wait for the final approval of the new legislation, a good deal of light has been shed on what should happen with the non-dom regime, both in terms of remittance of income earned abroad and in relation to inheritance tax (IHT). This new regime
replaces the concept of domicile as a relevant connecting factor in the UK tax system with a system based on tax residence.
KEY ANNOUNCEMENTS
1. Abolition of the Remittance Basis: The long-standing remittance basis, which allowed non-doms to shield foreign incom
e and gains from UK tax, has been abolished and replaced by the residence‑based regime.
.New Residence-Based Regime:
2. The new residence-based system will take effect from 6 April 2025 and non-doms will be taxed on their worldwide income and gains, subject to specific exemptions and reliefs.
The draft bill creates the foreign income and gains (FIG) regime, which will provide a relief from UK taxes for the first four years of tax residence for new arrivals.
An important exception to the new residence-based regime are offshore life insurance policies and investment bonds subject to taxable event gains, regardless of whether the policy is a personal portfolio security or not, which will not be eligible for exemption under the 4-year FIG regime.
3. Temporary Repatriation Facility (TRF): A TRF has been introduced to allow individuals previously taxed on the remittance basis to designate amounts derived from pre-6 April 2025 FIGs at a reduced tax rate over a three-year period (12% for the first 2 years and 15% on year three) starting from 2025 to 2026.
This facility will be extended to distributions from qualified foreign trust structures.
4. Changes to Inheritance Tax (IHT): From 6 April 2025, the new residence-based system will apply to Inheritance Tax (IHT) and individuals will not be in the scope for UK IHT while she or he is not a long-term resident under the 10 out of 20 years residence test.
The nil rate band has been frozen at £325,000 until 5 April 2030, as well as the 'residence nil rate band' at the current £175,000.
Non-UK trusts will lose protected status, and income and gains of non-UK trusts with UK resident settlors may be taxable on the settlor. It is expected that settlors will be able to recover from the trust any income tax they pay on the trust's income.
Some of the definitions in the legislation are still being clarified, but it is expected that settlors will be able to off set personal losses against attributed gains. Long-term residents will remain subject to IHT for a period of between 3 and 10 years after leaving the UK, depending on how long they have been tax resident in the UK.
5. Capital Gains Tax (CGT): For capital gains realized on or after 30 October 2024, the base rate of CGT will increase from 10% to 18% and the top rate will increase from 20% to 24%.
Current and past users of the remittance basis will be able to rebase personally held overseas assets up to 5 April 2017 on a disposal where certain conditions are met.
IMPLICATIONS FOR NEW ARRIVALS AND CURRENT NON-DOMS
For New Arrivals:
Four-Year Tax Holiday: New arrivals to the UK who have been non-resident for at least 10 consecutive tax years will benefit from a four-year tax holiday. This means they will not be subject to UK tax on their foreign income and gains during this period.
Remittance Basis Abolished: After the four-year tax holiday, new arrivals will be subject to UK tax on their worldwide income and gains. The remittance basis, which previously allowed non-doms to shield foreign income and gains from UK tax, will be abolished.
For Current Non-Doms:
- Remittance Basis Abolished: The remittance basis will be abolished from April 6, 2025. This means non-doms, who are now deemed domiciled, will be subject to UK tax on their worldwide income and gains, regardless of whether they remit the funds to the UK.
- Transitional Arrangements: The government has introduced some transitional arrangements to mitigate the impact of the changes for current non-doms. These include a rebasing of foreign assets and a limited period of continued access to the remittance basis for certain individuals.
Other Key Points:
- Overseas Workday Relief: This relief, which allows non-doms to reduce their UK tax liability on foreign income earned while working abroad, will be retained but may be subject to certain restrictions.
- Stamp Duty Land Tax (SDLT): The surcharge on second homes has increased from 3% to 5%.
- VAT on Private School Fees: VAT will be introduced on private school fees from January 1, 2025.
NEXT STEPS
As the new regime unfolds, it is vital that those considering moving to the UK, as well as current non-domiciled residents, stay informed and take proactive steps to mitigate the impact of these changes.
We will continue to monitor the progress of the draft legislation and will provide updates as they become available, so please stay tuned.
Disclaim: This paper is based on draft legislation which is subject to change by the UK Parliament so does not constitute guidance or advice. It is produced to assist affected individuals to understand the UK government policy and it is expected that HM Revenue and Customs (HMRC) guidance will be made available before 6 April 2025 to assist individuals and advisers in applying the legislation.
