Autumn Budget 2024: Farewell to non-doms; hello to new residents
Rachel Reeves, the UK's first female Chancellor of the Exchequer, delivered her Budget to Parliament on 30 October 2024.
Changes to the tax regime for UK resident non-domiciled individuals ("non-doms") were first announced by the previous government in March 2024. On coming to power the Labour government announced their approach to the non-dom rules. Whilst broadly in agreement they indicated that there would be some changes. Many professional bodies and advisers (including Stephenson Harwood) have over the summer put forward comments and suggestions for the implementation of this significant overhaul of the non-dom rules.
Whilst the proposals remain broadly the same in outline there has been some softening with the aim of making this an "internationally competitive residence-based scheme".
Below we have summarised the proposals. On Budget day HMRC released a detailed 34-page technical note and 101 pages of draft legislation. It will take time to unpick the details and it is likely that there will be amendments as the legislation progresses. The government has noted that it would still welcome external views from interested parties during the implementation of this policy.
The new four-year regime for income and capital gains
The Chancellor confirmed that the current remittance basis of taxation will be abolished for non-doms with effect from 6 April 2025.
This will be replaced with a new four-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of ten tax years of non-UK residence. The new regime is essentially as originally announced in March.
Individuals who meet the conditions will not pay tax on FIG arising in the first four tax years after becoming UK tax resident and will be able to remit these funds into the UK free from any additional charges. In addition, they will not pay tax on distributions from non-resident trusts. They will, as currently, pay tax on UK income and gains.
The Statutory Residence Test will be used to determine tax residence, ignoring treaty residence or non-residence, and split years. It will be necessary to make a claim for each year the four-year FIG regime is to apply and it is possible to choose what FIG this applies to. For instance, it will be possible to apply the regime to one source of foreign income, but not to others or to foreign income, but not foreign gains.
Individuals who make a claim for the new regime to apply will lose their entitlement to personal allowances and the capital gains tax annual exempt amount. This is the same as currently for remittance basis users.
Individuals who have been tax resident for less than four years on 5 April 2025 (and who were non-resident for a period of ten years before that) can use the new regime while they are UK resident for the remainder of the four-year period.
Example: Pierre who became resident in the UK in 2022/23, after a ten-year period of non-UK residence, will have been resident in the UK for three tax years on 6 April 2025. He will be able to claim under the new four-year FIG regime for 2025/26 because this is his fourth year following a period of ten years of non-UK tax residence.
Once an individual no longer qualifies for the FIG regime, they will be taxed on the arising basis in the same way as a UK resident person. This includes in relation to income and gains arising within a trust settled by them, so that all such foreign income and gains would be potentially taxed in their hands as it arises.
Formerly Domiciled Residents
The Budget technical note confirms that the new FIG regime will apply to UK nationals and UK domiciled individuals so that the unfavourable regime for so called 'formerly domiciled residents' ie, those who were born in the UK with a UK domicile of origin will also be abolished from 6 April 2025. Provided that they meet the ten-year non-resident requirement such individuals will fall within the new 4-year regime.
Transitional arrangements
The previous government had proposed a one-year 50% reduction in the amount of foreign income that would be subject to tax, for individuals who moved from the remittance basis to the arising basis from 6 April 2025 and who were not eligible for the new FIG regime. As confirmed by the policy statement issued by the new government in July this will not be introduced. Such individuals will be liable for income tax on all foreign income from 6 April 2025 (subject to any reliefs such as double tax treaty relief).
However, the other proposed transitional provisions are coming into effect with some changes to the original announcement.
Capital Gains Tax Rebasing
If, on or after 6 April 2025, individuals who have claimed the remittance basis and have never been UK domiciled or UK deemed domiciled before 5 April 2025 dispose of foreign assets that they personally held at 5 April 2017, they will be able to elect to rebase those assets to their value as at 5 April 2017. The original rebasing date proposed was 5 April 2019.
Temporary Repatriation Facility (TRF)
In a bid to encourage non-doms to bring wealth earned overseas to the UK for both spending and investment, a new 12% rate of tax will be introduced for remittances of FIG made in tax years 2025/26 and 2026/27. The government has announced an extension of the TRF with a 15% rate of tax applying to remittances of FIG made in the tax year 2027/28.
This will apply where the FIG arose to the individual personally in a year when they were taxed on the remittance basis and the individual is UK resident in the relevant tax year.
The TRF will also be available to settlors or individuals who receive a benefit from an offshore trust structure during these three years. However, there are some qualifications to this.
There will be some relaxation of the mixed fund ordering rules to make it easier for individuals to take advantage of this lower rate but it will still be complex to administer.
From 2028/29 remittances of pre-6 April 2025 FIG will be taxed at normal tax rates.
Business Investment Relief, which allows the investment of unremitted foreign income and gains into the UK without triggering a tax charge, will also be abolished for new investments from 6 April 2028 when the TRF period ends.
Overseas Workday Relief (OWR)
Income tax relief is currently available to non-doms on earnings for employment duties performed outside the UK where the earnings are paid and retained offshore. The relief is available for up to three years.
From 6 April 2025 eligibility for OWR will be based on an employee's residence and not their domicile. Where an employee is eligible for the FIG regime they can make an OWR election which will allow them to make a claim for relief. From 6 April 2025 OWR will be available for up to four years.
OWR will be subject to an annual financial limit for each qualifying year being the lower of 30% of the qualifying employment income or £300,000 per tax year.
The new OWR will provide relief from income tax whether or not the employee's income is received in a UK or overseas bank account. If received offshore they will be able to remit it into the UK without a charge.
Inheritance Tax
Again, the inheritance tax (IHT) regime will move to a residence-based system from 6 April 2025. 'Long-term residents' will be subject to IHT on their personally owned non-UK assets.
An individual will usually be a long-term resident where they have been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. However, there will be transitional rules for non-domiciled or deemed domiciled individuals who are non-resident in 2025/2026.
For those individuals, they will only be long-term resident if they satisfy the existing deemed domicile test, namely whether they have been resident for at least 15 out of the 20 tax years immediately preceding the year of charge, and for at least one of the four tax years ending with the relevant tax year. If they return to the UK, the new rules will apply. This means that individuals who are non-UK resident from 6 April 2025 will not be impacted by the longer 'tail' provisions described below.
This transitional provision will not apply to individuals who are UK domiciled under common law on 30 October 2024 and the new long-term residence test will apply to them from 6 April 2025. As previously announced, there is to be a 'tail' provision to keep long-term residents within the scope of IHT after leaving the UK. However there has been some modification of the initial proposal which is to be welcomed.
Where a person has been UK resident for 20 years or more they will remain in the UK IHT net for ten years after leaving. This is a significant extension of the current domicile-based regime where a person continues to be deemed domiciled for IHT purposes for the first three years of non-residence. As such, they are only subject to IHT on their worldwide estate until the start of their fourth year of non-UK residence.
For those resident in the UK for between 10 and 19 years the time an individual remains in the scope of worldwide IHT after leaving the UK will be shortened.
Individuals who are resident between 10 and 13 years, will remain in scope for three tax years. This will then increase by one tax year for each additional year of residence. So, if an individual was resident for 15 out of 20 tax years on leaving, they would remain in scope for five years; if resident for 17 out of 20 tax years on leaving, they would remain in scope for seven tax years.
The test will reset where a person is non-resident for 10 consecutive years.
Trusts
From 6 April 2025, IHT will be charged on non-UK assets comprised in a settlement at times when the settlor is long-term resident. This means that settled non-UK assets will come in and out of charge based on the long-term residence status of the settlor at the time of the charge, rather than the status being fixed at the time the property became comprised in the settlement. So if the settlor is long-term resident in a tax year in which the ten year anniversary charge occurs IHT will be charged on all trust assets.
Importantly, where there is a subsequent change in the settlor's residence status an exit charge can also arise. From 6 April 2025 the effect of a settlor ceasing to satisfy the long-term residence test will mean that non-UK property becomes excluded property for IHT purposes and the new rules provide that an exit charge will arise. This will be at a maximum rate of 6%.
Where the settlor of a trust has died before 6 April 2025, whether non-UK assets are excluded property will be based on the old test, namely the settlor’s domicile at the time the property became comprised in the settlement. Where a settlor dies on or after 6 April 2025 the excluded property status will be fixed by reference to the settlor's residence status. If they are long-term resident at the date of death then all UK and non-UK settled assets will be within the scope of IHT for the duration of the trust.
What next?
Having been in limbo for some months, we do now have a much clearer idea of the final form of the proposals, and it is possible to look at how the new rules will impact on individual circumstances. Everyone's situation will be different and tailored advice will be required. These are extremely significant changes to already complex legislation. We will continue to follow progress closely.
