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Non-domicile regime update - what has happened?

HM Treasury released a policy paper on 29 July 2024 outlining the new government’s intentions regarding the non-domicile regime. The content confirms that the previously announced reforms will proceed as outlined.

We are promised more detail in Rachel Reeves’ first formal budget which will take place on 30 October.

Are the rules affecting non-domiciled individuals now final?

The policy paper confirms that the concept of domicile will largely become irrelevant for UK tax purposes from April 2025, and the remittance basis will be replaced by the Foreign Income and Gains (FIG) regime. In addition, a form of Overseas Workday Relief, for inbound internationally mobile employees, will be retained.

Eligibility for the new FIG regime will be based on an individual’s residence status. Despite calls for the FIG regime to be relaxed so the UK is more competitive compared to other international jurisdictions, the government has decided not to extend the length of the FIG regime. It will apply for a maximum of four years and only when the individual has not been a UK resident in the previous 10 years.

We expected this to be the case and individuals who are affected by the change, particularly those who are not yet deemed domiciled, should carefully consider what options are available to them now, before the new rules take effect from April 2025.

The new government has already introduced anti-forestalling measures in other areas which mean that announced changes will be backdated. It would therefore be sensible to complete any actions you wish to take before the budget on 30 October.

Will the transitional reliefs for non-domiciled individuals be introduced?

Transitional reliefs were previously announced for individuals affected by the changes to the non-domicile regime. These included:

• A rebasing of assets for capital gains tax purposes.
• A ’temporary repatriation facility’ (TRF) to allow offshore untaxed income and gains to be brought to the UK and taxed at a lower rate.
• A 50% discount to new foreign income received from April 2025, for a short period of time.

The policy paper has significantly changed these reliefs. The rebasing date, which was stated to be April 2019, is now being reconsidered, with final confirmation to follow. In addition, the 50% discount to new foreign income has been cancelled altogether.

The time the TRF is available for and the rate of tax that will apply is being reviewed, having previously been set at 12%. It is expected that the rate of tax will be increased. The TRF may also be extended to certain types of income and gains held in trusts.

What about inheritance tax?

Perhaps the most radical change announced by the previous government was to the way Inheritance Tax (IHT) applies after the concept of domicile is abolished.

The Conservatives had proposed that IHT should be charged based on an individual’s residence status. Until an individual has spent 10 years as a UK resident, IHT would only be charged on UK assets. After that, worldwide assets would be in scope. Once an individual was within the scope of worldwide IHT, they would need to spend 10 years as a non-UK resident to fall outside again.

The policy paper confirms that while there will be further engagement with stakeholders for ‘refinements’, there will be no formal consultation. Given the significance of these proposed changes, consulting with interested parties could help ensure they work in practice.

The amended proposals represent a major shift in how IHT is applied to non-UK assets. Anyone who is currently relying on non-domicile status, or the existence of trusts to limit IHT exposure, will need to consider their options as soon as possible.

British citizens living outside the UK for more than 10 years will escape UK IHT on their foreign assets and this exemption will continue for 10 years if they return to the UK for the final years of their life.

How are trusts being treated from April 2025?

It was announced in the 2024 Spring Budget that from April 2025 offshore trusts would lose the ‘protections’ that stopped income and gains of a settlor-interested trust from being attributed to the settlor as they arose, despite this being in place since April 2017.

The government has confirmed that these proposals will be adopted but has added that it will undertake a review of offshore anti-avoidance legislation in the light of these changes. The aim is to ‘remove ambiguity and uncertainty in the legislation, make the rules simpler to apply in practice and ensure these anti-avoidance provisions are effective’. This move will be beneficial as the existing provisions are complicated, unclear and inconsistent.

The government has indicated that any changes are unlikely to take effect until 6 April 2026 at the earliest. This is realistic because rushing changes through is likely to only make matters worse. However, this does create a challenge for affected taxpayers as action will be required in many cases at a time while the shape of the new rules will remain unclear or entirely unknown.

The government has also confirmed the intention to end the ‘excluded property’ status of trusts established by non-domiciled individuals. This will bring foreign trust assets within the scope of IHT.

This change is not a surprise as Labour indicated that excluded property trusts would be brought within the IHT regime after the Spring Budget. However, hints of transitional rules may provide some relief for those affected, but further clarity is needed, and this won’t be forthcoming until the budget at the earliest.

Unlike the general IHT reforms, there will be some external engagement in this area, with further details to be announced in the budget.

As with the other proposals, those affected will need to consider what options are available to mitigate the extended UK tax reach.

Actions you can take now:

• If you are not yet deemed domiciled, you should consider how to take advantage of the remittance basis this year, potentially realising foreign capital gains.
• If you have settled an offshore trust, you and your trustees will need to take advice on how the changes will impact you for income tax, capital gains tax and IHT.
• In some cases, actions should be taken before 30 October 2024.

How can we help?

It now seems all but certain that the previously announced changes to both the non-domicile regime and offshore trusts will go ahead from April 2025.

Although the detail of the legislation is not yet known, the direction of travel is clear. Those affected should take detailed advice to understand what options are available and to prepare to implement any changes prior to 6 April 2025.

If you would like help in understanding how the changes will affect you, please contact your usual 91̽»¨contact, Rachel de Souza or Andrew Robins.