Non Dom Rules Abolished – Introduction
Well, my Michael Caine and Italian Job material was totally wasted as what actually materialised looks little like the Italian flat tax system.
Instead, we have a regime that looks pretty similar to New Zealand’s 49 month exemption for overseas income and gains for those immigrating to the country. Not a lot of people know that [Stop it].
Of course, the only films that anybody knows that relate to New Zealand are the Lord of the Rings films. And, much like someone finally reaching the end of the Return of the King, I haven’t got the energy.
So, in short, the current rules for non-dom will be abolished from April 2025.
In its place, shining like a precious golden ring in the shire, will be a new residence based regime. They haven’t thought of a catchy new name for it yet. Which is disappointing. But perhaps we can come up with one between us?
This new regime will take effect from April 2025.
What will it look like?
Of course, for now, detail is limited.
New arrivals to the UK who qualify for the new regime will benefit from a full exemption on foreign income and gains for the first four years that they are resident for tax purposes.
In contrast to the current remittance basis, those foreign income and gains can be brought to the UK without penalty at any time (as long as they arose in the four year window).
After the four year window has closed, they will be taxed like any common or garden UK taxpayer.
Who might qualify?
The new regime will potentially apply to:
- new arrivals;
- Existing tax residents who have been tax resident for less than four years at 6 April 2025; and
- A transitional rule for 2025/26 for those caught by the fact they have lost the remittance basis and do not qualify for the new regime (see transitional rules below).
New arrivals must have had a continuous absence from the UK for a period of ten years.
Those who are already in the UK may benefit as well, although the window may be much narrower. This is because they will need to have been tax resident for fewer than four tax years from 6 April 2025. They can benefit until their four years are up.
Transitional rules
General
The above is relatively straightforward. The issues will arise when it comes to dealing with those who have been in the UK for much longer and might also have established trusts and other entities reflecting their status.
We are told that there will be the following transitional rules:
A temporary 50% reduction in the personal foreign income
For non-doms who will lose the remittance basis and do not qualify under the new regime, they will receive a 50% reduction in their personal foreign income. This looks like it will apply for 2025/26 only.
Re-basing of capital assets to 5 April 2019 values
The 50% reduction above applies to income only.
For CGT purposes a rebasing (to 5 April 2019 levels) for disposals that take place after 6 April 2025 for non-doms who have claimed the remittance basis under the existing regime.
Temporary Repatriation Facility
A question is what happens to unremitted income and gains that is currently sitting in financial limbo – as, if remitted under the old regime, it would suffer UK taxes.
A so-called Temporary Repatriation Facility is available.
Non-doms will be able to remit foreign income and gains that arose before 6 April 2025 at a rate of 12%.
This will only be available in the tax years 2025-26 and 2026-27.
Protected Trusts
We are told that all new foreign income and gains that arise within a trust from 6 April 2025 will be taxable.
However, where such income and gains arose in such a trust before 6 April 2025, then it will not be taxed unless:
- distributions or benefits are paid to UK residents; and
- the recipients have been here for more than 4 years
Inheritance Tax (“IHT”)
The main connecting factor that determines a person’s exposure to IHT is domicile.
So, if we are digging a hole and burying the concept for tax purposes, what is to be done here?
Well, for now, the Government doesn’t know.
We are told that the government will consult on the best way to move IHT to a residence-based regime. This will be watched closely by very many expats I imagine.
Helpfully, we are told that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK IHT regime.
Non Dom Rules Abolished – Conclusion
Well, we’ve known something was coming over the last few days, but some of the aspects of this announcement are a little surprising.
In general, I have no issue with a residence based scheme over one that is determined by domicile. It feels both more modern and objective.
However, I am surprised how short the window is for new arrivers to benefit from the new regime. Especially, when compared to other similar regimes around the world (and not even looking at low tax jurisdictions).
It is certainly bold. However, there is a part of me that is rather uneasy about whether this has been pitched correctly in the current, competitive international market for attracting wealthy individuals.
Time will tell.
Let me know your thoughts on this