Non-UK Domiciled Individuals: Policy Summary dated 29th July 2024

Following the recent UK General Election, anticipation has been building over the tax changes that the newly elected Labour Government might introduce, and particularly those concerning the taxation of non-UK domiciled individuals. On 29th July 2024, the UK’s Chancellor of the Exchequer, Rachel Reeves, addressed the House of Commons on public spending. On the same day, draft legislation for the Finance Bill 2024-25 was published, accompanied by a policy summary detailing the proposed changes to the taxation of non-UK domiciliaries. 

Shift to Residence-Basis & Foreign Income and Gains (FIG)

In effect, the domicile system as it applies within the framework of UK taxation will largely become redundant from 2025/26.  Foreign income and gains (‘FIG’) arising to an individual from 6th April 2025 onwards will be relieved from UK tax for the first four tax years of UK tax residence, providing the individual has not been UK resident in the previous tax 10 years.

Example: Mr. Arneson arrives in the UK on 30th June 2027 and is UK tax resident in 2027/28 under the residence tests.  He was last UK resident in the tax year 2014/15. For the tax years 2027/28 to 2030/31 inclusive, his foreign income and capital gains are free of UK tax, and furthermore can be remitted to the UK free of tax.

If an individual has used the remittance basis of taxation, any income and capital gains that arose up to 2024/25 inclusive and which were protected from UK taxation under a remittance basis claim will be taxable if later remitted to the UK.

This includes tax charges on those who use the FIG basis of taxation from 2025/26 onwards.  However, there will be a Temporary Repatriation Facility (‘TRF’) under which individuals who have used the remittance basis of taxation can, for a defined period only, remit FIG for tax years up to 2024/25 at a preferential rate of tax.  The period for which the TRF will be available and the applicable tax rate are yet to be decided. 

This principle may even be applied to historic, untaxed income and capital gains that have arisen to protected trust arrangements.  There may be scope for trustees to clear out their tax pools at lower rates of UK taxation for the beneficiaries.

Loss of Certain Protections for Protected Trusts

If the settlor has an interest in the settlement, as defined for UK income tax and Capital Gains Tax (CGT) purposes, then he or she will be taxed on the income and capital gains of the trustees under the arising basis if he or she is either or both domiciled in the UK as a matter of general law or deemed domicile. Otherwise, the income and capital gains are protected.

Example: Mr Gonzalez, a non-UK domiciled individual, had settled a trust offshore in 2010.  Neither he nor his spouse can benefit from the trust, it was settled for his children and grandchildren. Mr Gonzalez become deemed domiciled in the tax year 2027/28. For 2027/28 onwards, as long as he remains UK tax resident, he will not be taxable on trust income because neither he nor his spouse can benefit, but due to the extended definition of an interest under CGT provisions, he will be taxable on all capital gains arising to the trustees.

Transfer of Assets Abroad & Settlement Code

These are in parts complex tax codes and occasion difficulties of interpretation on certain matters. The government will conduct a review of these provisions with the aim of simplifying and removing ambiguity. Precisely what that might look like is pure conjecture at this stage, and it remains to be seen whether this could, in fact, be a move to tighten these provisions.

The suggestion is that any changes that arise out of the review seem likely to be implemented in the tax year 2026/27.

Transitional Arrangements

The announcements in March 2024 referred to tax charges on 50% of foreign income for those currently using the remittance basis of taxation, but who will not be able to avail of FIG for the 2025/26 tax year only. The Labour Chancellor has announced that this measure will not be introduced.    

Transitional Capital Gains Tax Arrangements

There will be rebasing of foreign assets for CGT purposes for those non-UK domiciled individuals who have used the remittance basis of taxation, although at this stage the rebasing date is not known.

Inheritance Tax & The Residence-Based System

The government has announced their intention to move to a residence-based inheritance tax regime, rather than the current domicile-based system. 

Foreign assets are currently outside the scope of UK inheritance tax for non-UK domiciled individuals and for trusts that have been settled by non-UK domiciled individuals. 

The proposal is that, for individuals, exposure to inheritance tax on foreign assets will be based upon their tax residence position, with foreign assets exposed from the start of the individual’s eleventh tax year of UK tax residence, with a trail for 10 tax years after their departure from the UK.

It appears that there may be changes in relation to trusts which currently have excluded property status, where foreign assets outside the scope of inheritance tax for the life of the trust irrespective of any later change in the domicile status of the settlor. It is not clear yet how this will impact existing excluded property trusts, but one might imagine that the inheritance tax status of foreign assets held on trust will be determined by reference to the residence position of the settlor. In other words, if the settlor becomes exposed to inheritance tax from his or her eleventh year of UK tax residence, then so too do any foreign assets held on a trust created by that individual.

We must wait to see how these proposals will impact once announcements are made in the Budget. 

If you require guidance or assistance in understanding and navigating the proposed changes to the taxation of non-UK domiciled individuals, please contact our tax experts.

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom Tax Services Limited to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.