NEWS & VIEWS
The government outlined its planned reforms to the taxation of non-domiciled (non-dom) individuals last week, saying it would end the “preferential” tax treatment of foreign income and gains (FIG) based on the “outdated” concept of domicile.
A new, residence-based regime will take effect from April 6, 2025. This will replace the current remittance basis of tax which only sees non-dom individuals taxed on overseas income and gains that are transferred into the UK.
A new, residence-based regime
Currently, a non-dom is entitled to claim the remittance basis of tax for up to 15 years of UK residence out of the past 20 years. After 15 years, a non-dom acquires a ‘deemed domicile’ in the UK and is taxed on their foreign income and gains.
Under the new regime, new arrivals to the UK will be provided with 100% relief on their FIG in the first four years of their tax residence. This is on the condition that the individual has not been a UK tax resident in any of the ten consecutive years prior to their arrival.
UK resident individuals who are ineligible for the new regime, or who choose not to make a claim for a tax year, will be subject to tax on their worldwide income and gains.
What about current non-doms?
Current and past remittance basis users will be able to rebase foreign capital assets they hold to their value at the rebasing date when they dispose of them.
The rebasing date will be set out in the Autumn Budget on October 30. The previous Conservative government had set the rebasing date as April 5, 2019.
Any FIG that arose before April 6, 2025, and while an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK. A temporary repatriation facility (TRF) will also be available for individuals who have been taxed on the remittance basis.
The TRF will allow individuals that have previously claimed the remittance basis to remit FIG that arose prior to April 6, 2025, and pay a reduced tax rate on the remittance for a limited period after the remittance basis has ended.
The length of time and rate that the TRF will be available has not yet been set. However, the policy paper contained assurance that it will be set to make use of the TRF “as attractive as possible.” The previous government had set the TRF to be a flat rate of 12%, available for tax year 2025-26 and 2026-27.
How does this differ from the Conservative’s plans?
The four-year regime adopted by Labour was originally outlined by the previous Conservative government in its Spring Budget. Labour have not taken on board all aspects of the Conservative’s proposed reforms, however.
The government said the Conservative’s approach to non-dom reform would have left “several advantages” for existing non-doms. As a result, Labour have committed to reviewing key areas of the previously announced reforms to ensure the new regime is “both fair and as competitive as possible”.
One area Labour have already decided to scrap is a policy that would have provided individuals who would have lost access to the remittance basis in the first year of the new regime a 50% reduction in foreign income subject to tax.
What about inheritance tax?
The new residence-based will also apply to inheritance tax (IHT) from the same date, April 6, 2025.
The policy paper said the government envisages a basic test for whether non-UK assets are in scope for IHT. This test will be whether a person has been resident in the UK for ten years prior to the tax in which the chargeable event, including death, arises. It will also have the provision to keep a person in scope for ten years after leaving the UK.
Any IHT charges arising on deaths occurring before April 6, 2025, will be unaffected by the changes and charged according to the existing rules.
The government said it will also end the use of Excluded Property Trusts to keep assets out of the scope of IHT. The rules and detail of their application will be published at the Autumn Budget in October following external engagement.