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The changes for non-domiciled individuals: What does this mean for you?  

The changes for non-domiciled individuals: What does this mean for you?  
David Horowitz

By David Horowitz

15 May 2024

The changes announced in the Spring Budget 2024 are far-reaching for those who currently claim non-domicile status. It is intended that the whole concept of domicile in taxation is gradually replaced with a system based on residence. 

From 6 April 2025, the current remittance basis of taxation will be abolished for UK-resident non-domiciled individuals. However, it will be replaced from the same date with a new four-year foreign income and gains (FIG) regime for individuals who become UK Tax residents after 10 tax years of non-UK residence. Those who will be within this four-year window (after 10 years of non-UK tax residence) on 6 April 2025 when the new regime is introduced, will be eligible for the new regime for the remainder of the four years.  We summarised the key changes in our recent article by Sonal Shah – Major changes for non-dom residents: The end of the remittance basis.

The changes present some opportunities for individuals who are likely to be in the UK for a longer period. So, what should you be considering if this impacts you and what are the potential wins? 

What have Labour said?

Based on recent polls and the odds at your local bookmakers, you could argue that the Conservative Party’s views on this matter are moot, given we may have a new government by the end of the year. Labour has released its non-domicile policy paper; many of the changes they put forward are in lockstep with what has already been proposed. However, there are several differences to note:  

  • Labour approves of the four-year FIG exemption for new arrivals  
  • The IHT qualifying period of 10 years is also accepted but, crucially abolishing excluded property trust status, and bringing such trusts within the full scope of IHT from 6 April 2025 
  • The 50% deduction for foreign income in 2025/6 will be scrapped  
  • The temporary repatriation facility will likely be extended beyond two years – however, the rate is currently unknown 
  • Labour will consult on giving relief on UK based investment income/gains in the first four years to continue to encourage investing in the UK 

Case Studies

Theo has been UK resident since 6 April 2021 and currently uses the remittance basis

Theo will still be able to claim the remittance basis in the next tax year (2024/25), but from 6 April 2025 he will be subject to UK tax on his worldwide income and gains. He will not be eligible for the four year rule.   

If Theo has unremitted FIG which arose whilst he was claiming the remittance basis, he will pay tax on thisif he brings it to the UK after April 2025. This means Theo will need to work under both the old and new rules. 

Theo should also consider taking advantage of the two-year transitional period (2025/26 and 2026/27) in which he will be able to remit FIG, which he has previously kept offshore, to the UK at a flat tax rate of only 12%. 

Brendan became UK resident for the first time in the last tax year (2023/24) and intended to use the remittance basis

Brendan will only be able to make use of the four-year rule for two years (2025/26 and 2026/27). He will be able to claim the remittance basis in the current tax year and in the tax year 2024/25. 

Brendan should consider deferring releasing any non-UK gains or receiving foreign income if possible, until after 6 April 2025. After that date he will be able to both receive these and to use them in the UK free of charge under the new four-year rule. 

Cleo is planning to move to the UK immediately

If Cleo moves to the UK she will only be able to claim the four-year rule for three of the four years (i.e., 2025/26, 2026/27 and 2027/28). It would probably be better for Cleo to delay becoming a resident in the UK until after 6 April 2025, as she will then be able to benefit from the four-year rule for the maximum four years and bring her FIG to the UK tax-free. 

If she cannot defer her UK residence until 6 April 2025, then if Cleo claims the remittance basis for a year, she would be able to remit her 2024/25 FIG during the two-year period following 6 April 2025, at the beneficial rate of 12% and should be able to rebase her personal assets to their April 2019 value. 

Ariella is a long-term UK resident and deemed UK domicile for UK tax purposes

Ariella will not be able to use the four-year rule. As she is already deemed to be UK domiciled for IHT and taxed on the arising regime, little will change unless she is the settlor of any trusts. 

If Ariella did settle a trust before she was deemed domiciled in the UK, the trust will lose its protection in relation to income and gains after 6 April 2025, and (depending on the terms of the trust) Ariella is likely to be taxed on the income and gains as they arise. 

Ariella should think about whether she needs to be a beneficiary of her trust, as if she and any spouse are excluded from benefitting, this may protect her from tax on the income of the structure. 

Potential planning opportunities – The use of an Offshore Bond 

With the changes in place, non-domiciled individuals may need to reassess their wealth management strategies to take full advantage of the opportunities presented by the new regime. 

With the loss of the ability to roll up income and gains UK tax-free within trusts, Trustees may need to revise their investment strategy. This may involve the use of roll-up funds or insurance wrappers. 

Outside of the generous four-year exemption of the FIG regime, steps can be taken to prevent income and gains from arising until the individual has left the UK. Typical strategies might now include the use of an Offshore Life bond. This could potentially be a panacea for non-domiciled individuals who want to shelter conventional investments.  

Offshore Life bonds benefit from an appealing tax regime that offers advantageous features to holders. One such feature is the ability to make annual tax-free withdrawals of 5% of the initial investment amount over a period of 20 years. 

Growth within the linked portfolio rolls up tax-free and the 5% withdrawals can be used overseas or brought to the UK without taxation (assuming the bond is funded with “clean” capital). This presents a significant advantage for investors. 

Furthermore, if in any given year the 5% withdrawal allowance is not fully utilised or not used at all, the unused portion of the allowance carries over to the following year. This rollover provision increases the effective amount of the allowance for the subsequent year, allowing for potentially larger tax-free withdrawals such as a 50% lump sum after ten years.  

Any withdrawals over the 5% (including all profits if the bond is cashed in) are subject to income tax. However, the regime could be highly attractive to any individual or family intending to leave the UK within twenty years. Once non-resident, they can cash in the bond free of any UK tax. However, one would still be subject to potential tax in the new jurisdiction to which they move.  

Next steps

Regardless of the outcome of the next election, changes for non-domiciled individuals are moving full steam ahead. If you would like to have an exploratory conversation to see if we can add value to your circumstances, do let us know.  

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