What non-dom tax regime changes can we expect from the UK’s new Labour Government?

Following the win by the Labour party in the 2024 UK election, we look at what changes Labour have proposed and what this may mean for the non-doms.

On 6 March 2024, the previous Conservative proposed radical reforms to the UK’s non-domiciled (non-dom) rules from 6 April 2025. Labour have now published a variety of tax policy papers on 29 July 2024 that set out their plans around tax changes, including the taxation of non-UK domiciled individuals.

In this blog, we will look at what these proposed changes and new regime mean to non UK residents that are deemed domiciled in other countries.

Background to changes in taxation of non-UK domiciled individuals

Non-doms are individuals whose permanent home, or domicile, is considered to be outside the UK. The current non-dom regime is a favorable tax regime allowing non-doms who are UK resident to opt to use the remittance basis of taxation. This means that currently that these individuals pay tax on their UK income and gains the same as other UK domiciles. However, they pay tax on their foreign income or gains (FIG) only when they are remitted, or brought into, the UK.

The rules have been adjusted and modified on numerous occasions, with the last big changes occurring in 2017, when a 15 year ‘cap’ was introduced, limiting the number of years a non-dom could benefit under the rules.

The previous government was committed to addressing unfairness in the tax system, so that long-term residents in the UK pays their taxes here. So, in the Spring Budget 2024, the conservative government announced the abolition of the current non-domicile tax regime.

From April 2025 it was proposed that there would be a new regime with a simpler residency-based system being introduced, giving new arrivals to the UK a four year period of UK residency in which they will not pay any tax on foreign income or gains.

After four years, those who continue to live in the UK will pay the same tax as other long-term UK residents. However, there were proposals for transitional arrangements whereby, individuals will benefit from a two year period in which individuals will be encouraged to bring in overseas wealth to the UK to spend and invest here, which would be taxable at 12%.

This reform would give preferential tax treatment based on domicile status for all new foreign income and gains (FIG) which arise from April 2025 and will abolish the remittance basis of taxation for non-doms and replace it with a modernised regime that is simpler and fairer.

Labour party’s plans for the non-dom regime

In their election manifesto the Labour party, indicated that they would implement further restrictions on the non-dom regime if they came into power.

On 29 July 2024, the new Labour government published a number of tax policy papers and consultations. Amongst these policy papers was a document that provides further clarity and Labour’s proposals on how the new government plans to reform the taxation of non-domiciled individuals.

New residence-based regime for foreign income and gains

The government will follow the reforms from the previous Conservative government by removing preferential tax treatment based on domicile status for all new foreign income and gains (FIG) that arise from 6 April 2025.

The remittance basis of tax will be removed, and a more internationally competitive residence-based regime will be implemented. This regime will provide 100% relief on FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival.

The protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year FIG regime from 6 April 2025.

Offshore anti-avoidance legislation

The government is also set to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation. The government intends to make the rules simpler to apply in practice, remove ambiguity in the legislation, and ensure these anti-avoidance provisions are effective. This review should not result in any changes before the start of the 2026/27 tax year.

Overseas Workday Relief (OWR)

A form of Overseas Workday Relief (OWR) will be retained. Officials will engage with stakeholders on the design principles for this tax relief and further details will be confirmed at the Budget on 30 October 2024.

Temporary repatriation facility

The government is considering extending what will qualify under the Temporary Repatriation Facility to potentially include income and stockpiled gains in overseas structures, further details will be given in the Budget on 30 October 2024.

A new Temporary Repatriation Facility (TRF) will be available for individuals who have been taxed on the remittance basis. Individuals that have previously claimed the remittance basis will be able to remit FIG arising prior to 6 April 2025 and pay a reduced tax rate on the remittance for a limited time period after the remittance basis has ended.

Tax exemption

The government will scrap the Conservative proposal for a tax exemption covering 50% of foreign income arising in the first tax year where a non-UK domiciled taxpayer fails to qualify for the new FIG regime and moves to the arising basis of taxation.

Capital Gains Tax (CGT)

UK resident individuals who are ineligible for the 4-year FIG regime (or who choose not to make a claim) will be subject to Capital Gains Tax (CGT) on foreign gains in the normal way. For CGT purposes, 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 during the transitional arrangements. The rebasing date of foreign assets may not be 5 April 2019 as set out by the previous Conservative government. The government is considering the appropriate rebasing date and will set this out at the Budget.

Capital Gains Tax rates can be found here.

Inheritance tax residence

UK Inheritance tax (IHT) is currently a domicile-based system. This looks set to be replaced with a new residence-based system from 6 April 2025. This will affect the scope of property brought into UK IHT for individuals and trusts.

It looks likely that the basic test for whether non-UK assets are in scope for UK Inheritance Tax from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises. Provisions will be included to keep a person in scope for 10 years after leaving the UK. Deaths occurring before 6 April 2025 will be unaffected by these changes and will be charged under the existing rules.

The government will end the favourable tax treatment enjoyed by Excluded Property Trusts with details being announced on 30 October 2024 Budget. The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here.

This will affect people who have already set up structures based on current rules and the government will consider how transitional rules may be implemented for affected individuals. They have implied that the effect of the changes will be mitigated for trusts already in existence.

What do these proposals mean for non-doms?

Whilst Labour’s proposals have largely been what was expected, full details concerning the proposals will be published at Rachel Reeves’ first Budget on 30 October 2024.

There is some reassurance for some individuals that have previously set up excluded property trusts may get some transitional rules to limit their exposure to inheritance tax on the value of assets in these trusts.

By retaining Temporary Repatriation Facility but extending it beyond personally held income and gains and the previously announced two-year period from 6 April 2025, may allow time for people to take advantage of it.

The IHT proposals around the ten-year UK residence period seem to be going ahead rapidly, so long-term residents will need to look at their IHT exposure as soon as possible to consider this new regime.

Along with the potential changes to non-domicile tax rules, Labour have said its government will not increase rates of National Insurance, Income Tax or VAT but it has not given any further details on their plans on Capital Gains Tax. Should CGT be increased, it could affect individuals on the rates payable when UK resident beneficiaries receive a capital distribution from a non-UK trust.

When are these changes likely to happen?

It is likely that more announcements and clarity will be given in the Budget on 30 October 2024 by Rachel Reeves and changes will happen from 6 April 2025.

However, the uncertainty around whether Capital Gains Tax will increase means that this change may happen sooner than April 2025.

What should non-domiciled individuals do now?

The new government have confirmed that the existing non-dom tax regime will be abolished in April 2025. The impact of the proposed changes will depend on your existing status and future plans.

The chancellor said more details of the new regime will be unveiled in the October 2024 Budget alongside full economic and fiscal forecasts from the Office for Budget Responsibility.

These proposals that have been released prior to the October 2024 Budget will allow individuals to begin to plan with a greater degree of certainty. However, individuals should speak to specialist accountants such as dns accountants as soon as possible to review their current position and look at their long-term plans for your family, residency and business.

Most individuals on the current non-dom regime will still benefit from the current rules but should be prepared to review their circumstances when the Budget announcements are confirmed. Those with complex arrangements should begin a review as soon as possible.

If you are planning on leaving the UK should still plan to become a non-UK resident before 6 April 2025 if at all possible.

It’s still critical if you are planning to spend some time outside of the UK, that you comply with the UK’s statutory residency test and avoid any potential issues. Seek professional advice from dns accountants.

Our advice for anyone that may be affected by these changes to non-domiciled rules, should contact dns accountants now on 03300 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Frequently Asked Questions on non-domicile rules

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