Yesterday, UK Chancellor Jeremy Hunt stole the Labour party’s thunder by announcing the abolition of the non-domicile regime from 6 April 2025. It will be replaced it with a transitional residence scheme. This will effectively scrap the concept of domicile altogether. To date, domicile has been an important concept in two areas of UK taxation:
1. For income tax and capital gains tax, it gives access to the ‘remittance basis’ of taxation; and
2. It determines the geographical scope of inheritance tax.
The remittance basis – a recap
Broadly, a non-UK domiciled individual can elect each year to be taxed on the remittance basis, excluding their foreign income and gains from UK tax. If these foreign income and gains which have escaped UK taxation are subsequently brought (‘remitted’) to the UK, then they are subject to UK tax.
This regime has attracted many wealthy people to the UK, but it disincentives them from bringing a lot of that wealth to the UK. There is tax relief for investing in businesses, but this is complex and has not been as widely used as was hoped.
The new rules from April 2025
The current remittance basis of taxation will be abolished and domicile will become irrelevant. A new regime based on UK residence will instead be introduced. Those who have been non-UK resident for 10 tax years will be able to elect not to be taxed on their foreign income and gains for the first four years of UK residency. Importantly, they are free to bring that income and gains to the UK without incurring a further tax charge.
What if I am already in the UK?
Those currently claiming the remittance basis will not be able to benefit from the new regime if by 6 April 2025 they will have already been in the UK for four tax years or longer.
Crucially, non-doms will continue to be taxed on any funds they bring to the UK which they had previously sheltered from UK tax using the remittance basis. However, as the new regime is designed to encourage capital to be brought to the UK, there is a temporary flat rate of tax of 12% for two years from 6 April 2025 for such funds remitted to the UK. After this, the usual tax rates apply.
There are some additional measures to ease the transition to the new regime:
· A 50% reduction on the foreign income subject to UK tax in the 2025/26 tax year (this does not apply to capital gains); and
· Foreign assets held personally which are sold from 6 April 2025 can be rebased to their value at 5 April 2019.
Inheritance tax changes
Under the existing inheritance tax (IHT) rules, the geographical scope of IHT follows domicile: people who are UK domiciled are subject to UK IHT on their worldwide assets, but people who are not UK domiciled are only subject to UK IHT on their UK assets. The non-UK assets of non-doms are “excluded property”. This means that once someone becomes deemed UK domiciled (when they have been resident in the UK for 15 of 20 years) then their worldwide assets fall into the UK IHT net.
From April 2025, IHT will follow residency instead of domicile. Once someone has been UK resident for 10 tax years, they will be subject to UK IHT on their worldwide assets. However, they will remain fully within the UK IHT net until they have been non-UK resident for 10 years, at which point their non-UK assets will fall outside of this net.
Inheritance tax planning ahead of the changes
Existing IHT planning involving offshore trusts (“excluded property” trusts) will still possible until 6 April 2025.
This existing planning hinges on the fact that the IHT status of an offshore trust mirrors the domicile of the settlor of that trust at the time when they settle it. Therefore, if someone settles non-UK assets into an offshore trust when still non-UK domiciled, these assets are protected from UK IHT even after the settlor becomes deemed UK domiciled.
From 6 April 2025 it will no longer be possible to indefinitely shield foreign assets from UK IHT by settling them into trust. It is proposed that the IHT status of a trust settled from 6 April 2025 follows that of the settlor on an ongoing basis, not just when the trust is settled. Therefore, if a settlor is UK resident for 10 years, the worldwide assets of the trust would fall within the UK IHT net.
However, planning implemented before 6 April 2025 is expected to remain effective even after the new IHT regime comes into force.
What can I do?
If you have significant assets outside of the UK, you may wish to consider settling them into an offshore trust before 6 April 2025 to protect them from UK IHT net indefinitely.
Once you have been resident in the UK for 10 years, it will then take 10 years to escape the UK IHT net. Therefore even if you do not expect to remain in the UK much past 6 April 2025, it is important to shield your non-UK assets from UK IHT.
If you plan to remain in the UK, the 12% flat rate of tax for remitting foreign income and gains should be attractive, given that tax rates are otherwise up to 45%.
You may wish to collect key information such as historic income and gains, and values of assets at April 2019 for CGT rebasing.
We recommend speaking with your tax and private wealth advisers to understand the implications of the changes to your specific circumstances, and plan now for your future.
