The « non domiciled » community living in the UK has been quite agitated since the Conservative Government announced the end of the remittance basis regime back in March 2024. New rules are supposed to enter into force from April 2025 but with General Election taking place in July and no draft legislation available at present, a lot of uncertainties remain.
Non-doms and the remittance basis regime
For many years, thousands of wealthy individuals chose the UK as their main place of residence, not only for the attractivity of its social and cultural lifestyle, its economic dynamism, and the beauty of its countryside but also for its very attractive tax regime (only available to those who could claim to be domiciled out of the UK, i.e. non domiciled). Indeed, if an individual resides in the UK with no intention to stay in the country on a permanent or indefinite basis and maintains strong links with their foreign country of domicile with the intention to return there at one point, they are considered to be domiciled out of the UK and can therefore benefit from the so-called “remittance basis regime”. Such regime could be claimed for an unlimited duration for many years but has been limited to 15 years of residence back in 2017. If the remittance basis is claimed in the tax return, then foreign income and gains would only be taxable if and when remitted to the UK, which represents a very attractive tax planning opportunity (knowing that there is no wealth tax in the UK). After 15 years of residence (out of the 20 previous UK tax years), a non-domiciled taxpayer would become “deemed domiciled” for all tax purposes (i.e. taxed on a worldwide basis as well as application of UK IHT on the worldwide estate in case of death).
New regime applicable as from April 2025
As from April 2025, the non-dom regime as we know it will end and will be replaced by a 4-year regime applicable to new immigrants: the Foreign Income and Gains regime (called the “FIG” regime).
Under this new regime, taxpayers who have not been UK resident for the last 10 years can elect not to pay any taxes on their foreign income and gains (they will remain subject to taxation on their UK-source income and gains though). Such exempted income and gains can be used in the UK without any tax implications or conditions. After 4 years, the taxpayers become subject to taxes on arising basis as any UK resident taxpayers.
- Some transitional measures will be available for those who previously benefitted from the remittance basis regime and who will fall out of the new FIG regime:
- Possibility to rebase the value of capital assets personally held to their values as at 5 April 2019 for disposals which will take place on or after 6 April 2025
- Special taxation for the 2025/26 year: only 50% of their foreign income will be taxable (such exemption will not apply to chargeable gains and has already been contested by Labour)
A two-year “Temporary Repatriation Facility” in the 2025/26 and 2026/27 tax years that will allow the remittance of pre-6 April 2025 untaxed income and gains to the UK subject to a flat rate of only 12% (instead of up to 45% for income and 20% for capital gains)
What about inheritance tax?
The subject of inheritance tax (hereafter “IHT”) in the UK is a tough one. Indeed, a flat tax rate of 40% applies above GBP 325’000 (the so-called “nil-rate band”) on the deceased’s worldwide estate. A full exemption between spouses exists, however transmissions to the children can generate a substantial tax burden. For non-doms under the current regime, the problem is inexistent for their non-UK assets as long as they have not become deemed-domiciled in the UK.
Such rules, mainly based on domicile, will be replaced by new rules (subject to consultation), which will bring within the scope of IHT the non-UK situated assets owned outright by an individual once they have been UK tax resident for 10 years. In addition, non-UK situated assets will remain within the scope of IHT for 10 years after leaving the UK (the “10-year tail”).
Can trusts still help?
Since the 2017 reform, non-UK trusts established by non-doms before they become deemed-domiciled have benefitted from “protected settlement status”, meaning that the settlor is protected from an immediate tax charge on income and gains arising within the trust structure (on top of a protection from IHT). Instead, the settlor (and other UK resident beneficiaries) pay tax in respect of trust profits only to the extent that they receive a benefit from the trust which is “matched” with income or gains within the trust structure.
From 6 April 2025, such protection will end for all trust structures (including those already in existence). Under the new regime, foreign income and gains arising in the trust will be taxed in the settlor’s hands (provided he is not excluded from the trust benefit and is still resident in the UK). If the settlor qualifies for the new 4-year regime, they will not pay UK tax on the income and gains of the trust as they arise or on receipt of trust distributions.
According to the announcements made in March, non-UK assets that are settled by a non-UK domiciled settlor in a trust prior to 6 April 2025 are supposed to remain protected from IHT. However, the Labour already made it clear that IHT will be due even if the assets are held in trust, no matter when the trust was set up.
Are there any tax planning opportunities?
If a taxpayer is going to be taxed on their worldwide income and gains as from April 2025, it may be wise cashing foreign income and realising offshore gains while benefitting from the remittance basis. Such income and gains would indeed not be taxable as long as they remain abroad and are not remitted to the UK.
It might also be more and more attractive to use offshore bonds (UK compliant life insurance policies) or family investment companies (subject to corporate income tax) to achieve tax deferral.
In relation to IHT, it will also still be possible to give assets away while the donor is still not subject to IHT or to give and survive 7 years if they have become deemed-domiciled (so-called “potential exempt transfers”). Life cover can also help protect against the risk of death during this 7-year period.
Many people will also consider relocating to a third jurisdiction as the tax environment is possibly getting worse with the Labour in charge and options are quite varied nowadays.
This article is brought to you by the Wealth Planning Solutions Team.
Contributors: Samuel Favre - Wealth Planner, Sylvain Pichard - Head of Wealth Planning Solutions