The Autumn 2024 Budget introduces some of the most sweeping changes for non-doms in recent years. We are now moving to a tax residence-based system and away from the concept of domiciliation.
For many years, UK tax rules have meant that non-doms do not have to pay UK taxes on income and gains arising outside the UK, provided those funds are not remitted to the UK. This system has been advantageous to individuals with significant overseas income or wealth, but has drawn criticism over time, particularly given the political sensitivity.
Historical Context: Evolution of Non-Dom Tax Benefits
Non-dom tax status has undergone several legislative changes over the years. In 2008, a remittance basis charge was introduced, allowing non-doms to keep their tax exemptions by paying a fee. By 2017, however, stricter rules were established: individuals who had been in the UK for 15 out of the previous 20 years were treated as UK domiciled for tax purposes.
Now, the Autumn 2024 Budget has abolished the concept of non-dom and replaced it with a regime based on residence, influenced by a drive to modernise the system to make it fit for a mobile world. The UK government aims to encourage short-term residents with global income, while tightening the tax requirements for those with extended residency in the UK.
Key Changes Introduced in the Autumn 2024 Budget
1. Shift Towards Residency-Based Taxation
From 2025, the UK will be taxing individuals on their global wealth based on how long they have been UK tax resident, as opposed to in relation to their domicile status. Residency is based on the length of time someone has lived in the UK, rather than more esoteric rules around domicile. We can determine someone’s residency with a high level of confidence, whereas we cannot determine domicile so easily. This is welcome as taxpayers need certainty.
2. Four-Year Rule for Extended Residency
Under the new rules, individuals who have been resident in the UK for more than four years will be subject to full UK taxation on their global income and gains. This marks a considerable reduction from the previous 15-year threshold and is likely to impact many non-doms who had anticipated longer tax-free periods for their unremitted foreign income and gains.
3. Implications for Trusts and Offshore Structures
Many non-doms use trusts and other offshore structures to manage their international wealth. The new rules may mean that individuals who have been UK residents for over four years will face UK tax on income from any such trusts, whilst they remain connected to the UK. This change introduces a new level of complexity for wealthy individuals who may need to restructure or reconsider their trust arrangements.
4. Tax incentives to remit previously unremitted foreign income and gains.
As an incentive, the government is introducing a tax rate of just 12% on any income and gains that are remitted to the UK after 6th April 2025 but before 5th April 2027 (at a rate of 15% between then an 5th April 2028) where those income and gains arose prior to 5th April 2025.
5. Inheritance Tax Reforms
There are two significant Inheritance tax (IHT) reforms that form a crucial component of the 2024 Budget. Now, after just 10 years in the UK, non-doms will be liable for inheritance tax on their non-UK assets when they die. This is a significant reduction in the number of years where overseas assets were protected from UK IHT. Secondly, offshore assets owned by non-UK trusts will also fall within the scope of UK IHT where those trusts are settlor interested and the settlor lives in the UK.
Considerations for Expats: Changes to Exiting the UK Tax System
This rule may be particularly beneficial for UK citizens relocating overseas because expats who have spent more than ten years living outside the UK will no longer be subject to inheritance tax on their non-UK assets.
For those previously under the non-dom regime who have been in the UK for less than 20 years, the time it will take to release non-UK assets from the grip of the UK IHT exposure may be as little as 3 years.
This clarification of both expats’ and shorter term visitors’ IHT obligations provides greater predictability for those looking to manage their financial responsibilities long-term, offering a pathway to sever financial ties with the UK – something that was not always possible before.
Practical Considerations for Short-Term Residents and Global Employees
The reforms also have a distinct advantage for globally mobile individuals and short-term residents who may only spend a few years in the UK. For example, foreign employees or executives on three-year assignments will now find it easier to manage their finances without needing to worry about UK taxes on their non-UK income, whether they bring these funds into the UK or not.
This flexibility encourages high-skilled workers from the US, Australia, and other regions to work in the UK without substantial tax implications on income or investments held abroad, or onerous record keeping and segregation for short term visitors.
The Cost of Compliance and Reporting Requirements
However, the updated regulations include expanded reporting requirements, particularly for those holding assets in jurisdictions with different tax years and reporting timelines. Those affected will need to disclose more information about their international finances, with potential challenges arising from mismatched reporting periods between the UK and other countries.
For instance, while the UK tax year runs from April to April, most countries operate on a calendar year basis, which can lead to complications and delays in compliance. People with investments across multiple jurisdictions will need to work closely with tax advisors to manage these reporting obligations effectively.
Planning Strategies for Non-Doms: Navigating the New Landscape
The Autumn 2024 Budget’s changes mean that effective tax planning is more crucial than ever for non-doms. Here are some key strategies that may help individuals adapt:
Re-evaluate Offshore Trusts
Offshore Trusts have historically offered non-doms a way to protect their overseas assets. However, given the four-year residency rule, individuals with complex offshore structures may wish to re-evaluate their trust arrangements or consider alternative structures to minimise long term UK tax exposure.
Consider Timing of Income and Gains
For non-doms planning to remit income or gains to the UK, the timing of these remittances could significantly impact their tax liability. With the reduced rates on remittances of pre-2025 income and gains from next April, individuals may consider waiting until after then to bring these funds to the UK to benefit from lower tax rates.
Strategic Relocation and Residency Planning
Individuals considering a prolonged stay in the UK should plan carefully, especially if they anticipate a future need to exit the UK tax system. Expatriating before reaching the four-year threshold may help preserve tax-free status on foreign income. Meanwhile, those who plan to return to the UK should aim to structure their finances with foresight to optimise their tax positions.
Navigating an Evolving Tax Landscape
For high-net-worth individuals and international professionals considering the UK as their home, the transition from domicile-based to residency-based taxation reflects a broader shift that requires adaptation. Non-doms will need to stay vigilant, especially as the government is expected to refine these rules further.
On the other hand, these changes could offer significant advantages for UK domiciled individuals considering a move abroad.
By engaging with knowledgeable tax advisors like Gravita, non-doms can best position themselves to manage the new challenges and potentially benefit from new planning opportunities under the updated framework.
What next?
If you want to know more about anything discussed in this article, get in touch with one of our experts here at Gravita.
