Budget 2024: how the 'non-doms' changes could affect you

The Budget confirmed very significant changes to the taxation of ‘non-doms’. Labour’s changes had been foreshadowed in the policy document issued by the Conservatives in 2024 and were therefore expected. However, the October Budget provided further detail and some new additions.

In this note we summarise the proposed new rules and the key areas in which they are likely to have an impact.

Rothschild & Co does not provide tax advice and you should always verify your position with a tax adviser before taking any action or making decisions.

Background

At present, individuals who are not domiciled (but resident) in the UK for tax purposes are not subject to tax on their overseas income or gains unless, or until, they are remitted to the UK. This was known as the remittance basis of taxation. Moreover, by the use of offshore structures, non-doms could often shelter their assets from inheritance tax (IHT).

The government proposes to replace the concept of domicile as a basis for determining liability to tax, with a test instead based on residence. The government’s stated aim is to address “unfairness in the tax system so that everyone who is long-term resident in the UK pays their taxes here”.

The change to a worldwide basis of taxation

From 6 April 2025, domicile will cease to govern liability to tax. All long-term residents will pay tax on their worldwide income and gains. This is called the arising basis of taxation. There are detailed provisions for deciding if an individual is a long-term resident, but part of the definition is that an individual will be considered a long-term resident if they have spent at least 10 of the last 20 tax years in the UK.

The reliefs

The above is a dramatic and far-reaching change. To mitigate its impact, the government has proposed a number of provisions and reliefs.

Firstly we’ll consider the foreign income and gains (FIG) regime. It is proposed that for their first four years of UK tax residence after a period of 10 consecutive years of non-residence, individuals will not pay tax on their FIG (even if they remit those income and gains to the UK).

A claim to benefit from the FIG regime must be made via the filing of a tax return. It will be necessary to quantify the amount of income and gains for which relief is being claimed.

The FIG regime is wide ranging – it can apply to UK nationals, not just non-doms, who satisfy the qualifying criteria on residence. While not all overseas income will qualify for the FIG regime, many types of income will, including offshore income gains but excluding offshore bonds.

An individual who claims the FIG relief loses their entitlement to a personal allowance and their annual CGT exemption for the tax year in which they make the claim.

The breadth of the FIG regime is further demonstrated by the fact that it can extend to a distribution from an offshore trust to a beneficiary. There are detailed rules on such distributions to beneficiaries and trustees should review the position with their tax advisers. This could be a significant opportunity for those who have an interest in a trust (not necessarily just offshore trusts) and who satisfy the qualifying criteria for the FIG regime.

Second, for CGT purposes, there will be a rebasing relief. Those who have previously benefitted from the remittance basis of taxation and are not domiciled will, for disposals on or after 6 April 2025, be entitled to rebase offshore assets they own personally to their market value at 5 April 2017.

There are a number of qualifying conditions and individuals should check their eligibility with their tax advisers. Where an individual qualifies for rebasing, the decision will have to be taken as to whether a disposal of the asset should be delayed until after 6 April 2025. This may require the individual to liaise with both their tax adviser and their investment advisers.

The third provision is the temporary repatriation facility (TRF). Many non-doms have historically generated funds outside the UK which would be taxed if they were remitted to the UK. The rationale for the TRF is to encourage individuals to remit these monies to the UK. TRF encourages remittances by providing for a lower rate of tax on funds that qualify for the TRF (although bizarrely, the amounts designated for TRF purposes need not actually be remitted to the UK).

The TRF will be available for three years from 6 April 2025.

The TRF tax rate will be 12% for the tax years 2025/26 and 2026/27, and will rise to 15% in 2027/28. An individual will designate the amounts to be covered by TRF. It will be possible to designate amounts that are not held as cash, for example, an interest in an offshore fund.

The TRF will be an important relief for those who previously used the remittance basis of taxation and tax payers will wish to consider how to take advantage of it.

Offshore trusts

Many non-dom individuals have created offshore trusts to hold their assets. Prior to the changes proposed in the Budget, such trusts could be very tax-efficient vehicles as they could shelter offshore income and capital gains from immediate tax charges. In addition, if an individual created a trust before they became deemed domiciled in the UK, the trust would provide a permanent shelter from IHT for assets situated outside the UK.

From 6 April 2025, it is proposed that such a trust should lose most, if not all, of its tax advantages. The changes envisaged are far reaching and can result in unexpected tax charges, such as if a settlor of the trust leaves the UK.

Particular care will be required in relation to inheritance tax (IHT) as the tax position can change simply because the settlor of the trust changes their tax status. Moreover, the new IHT rules can apply to trusts created many years before this Budget.

The new IHT rules are complex and can depend, at least in part, on the form of the trust, such as whether it is discretionary or interest in possession. As such, the only safe course is to review each trust separately with a tax adviser.

In essence, however, under the pre-2025 rules, any liability to IHT was fixed by the domicile of the settlor at the date the trust was created. This was a one-off snapshot, which gave certainty and did not require the position to be monitored on an ongoing basis.

In contrast, under the new rules, any liability to IHT is determined by the tax residence status of the settlor – was the settlor a long-term resident at the material time? This means that the tax position of the trust can change as the tax status of the settlor changes.

This will make life very difficult for trustees. Their IHT position can be governed by an individual (the settlor) with whom they may now have little or no contact.

HMRC has published a technical note (‘Reforming the taxation of non UK Domiciled individuals’) which contains a detailed explanation of the new IHT rules and includes some helpful case studies.

Trustees should review this document with their advisers. The IHT changes can also impact UK trusts where the settlor changes their long-term resident status and so even UK trustees should have regard to these new provisions.

The changes to the income tax and CGT position of offshore trusts are just as fundamental as those for IHT. Trustees will again wish to have regard to the technical note detailed above.

From 6 April 2025, offshore trusts under which the settlor retains an interest will effectively become transparent for tax purposes – income and gains will be taxed on the settlor as they arise. A trust will be ‘settlor interested’ for these purposes if the settlor, the settlor’s spouse or the settlor’s children or grandchildren could possibly benefit from the trusts.

These changes may prompt trustees to readjust their position, for example by excluding the settlor or by holding trust assets via a ‘wrapper’, such as a fund or offshore bond, so as to defer any tax charge on the settlor until the trustees dispose of an interest in the ‘wrapper’.

Once again there will be no ‘one size fits all’ solution and trustees will need to consider the new rules in light of their particular circumstances.

These are dramatic changes, but the impact of them can be lessened where the beneficiary receiving a distribution qualifies for the FIG regime.

Conclusion

While most of the non-dom detail was known ahead of the Budget, the Chancellor has announced some important additions many of which will help non-doms.

For those who could previously benefit from the non-dom regime, the new world will not be as kind as they hoped for. Equally, however, with careful restructuring and sensible use of the reliefs offered, they can show a brave face to the world ahead.

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