Budget 2024: Abolition of the Non-dom basis - Key Points

Individuals

·      From 6 April 2025 the remittance basis of taxation for non-doms will be abolished.

·      Instead, a new 4-year ‘foreign income and gains’ (FIG) regime will be introduced:

o   It will apply only to those who have a 10 year period of non-UK residence i.e. it is aimed at ‘new’ arrivals to the UK.  (But someone who is already in the UK but has been here for less than 4 years, can benefit for the balance of the 4 years period, provided that they had previously been non-resident for 10 years).

o   Qualifying individuals will not pay UK tax on their FIG during those 4 years.  (Currently, non-domiciled individuals can avoid tax on their FIG for broadly 7 years without any charge, and 15 years with the payment of the annual ‘remittance basis charge’)

o   Whereas non-doms currently cannot ‘remit’ FIG without paying UK tax, under the new regime the FIG on which no tax will have been paid can be brought to the UK.

·      Transitional provision 1 For those moving from the non-dom regime to the new regime, only 50% of all foreign income (but not gains) will be taxable in the tax year 2025/26.   

·      Transitional provision 2 (temporary repatriation facility (TRF))

From 6 April 2025, individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittances of pre-6 April 2025 FIG under a new Temporary Repatriation Facility (TRF) that will be available for tax years 2025-26 and 2026-27. TRF will not apply to pre-6 April 2025 FIG generated within trusts and trust structures. 

·      Capital Gains Tax rebasing:  Beyond 6 April 2025, and assuming the new regime is not (or ceases to be) available to an individual, he or she will become liable to UK capital gains tax on worldwide gains.  Individuals who had previously claimed the remittance basis but who had not become domiciled or deemed domiciled by 5 April 2025, will be able to elect to ‘re-base’ the value of any non-UK asset to 5 April 2019.

·      Inheritance Tax:  Currently, UK inheritance tax applies to the worldwide assets of UK domiciliaries and to those who become deemed domiciled.  This occurs (broadly speaking) after 15 years of UK residence.  The proposal – which will be subject to consultation and about which there is little detail at this time – is to move to a rule based on ‘10 years of residence’.

Trusts

·      The existing ‘protection’ of FIG within trust structures will change.  The rules in this area are already complex, and we will need to await further details; however, it seems that;

o   Income and gains within a ‘settlor-interested’ trust (i.e. one that a settlor can benefit from) will become taxable on an arising basis on the settlor, subject only to the new 4 year FIG regime.

o   The taxation of trust distributions will be determined by whether or not the settlor or beneficiary is within the 4 year FIG regime; however, if they are within it, distributions may be possible to the UK without UK tax arising.

·      The inheritance tax rules around ‘excluded property’ trusts will change; however, it appears that existing trusts may continue to be protected, as will trusts established before 6 April 2025.  A new regime will be established for trusts created after 6 April 2025 (with reference to the proposed new ‘10 year’ rule) and there will be a consultation on those new rules.

Politics

The abolition of non-dom status has been a key Labour Party policy and the Conversative Party has really ‘stolen its thunder’ by this announcement. 

One interesting point, of course, is that although these rules can be legislated for in the next few months (in Finance Act 2024), they do not take practical effect until 6 April 2025, by which time we are likely to have had a change of government.

There is always the possibility then that the rules will be changed still further before they start to apply and if they do, the likelihood must be that they will become ‘harsher’ in some areas.