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Non-dom reform and Labour’s view

The Spring Budget announced measures to abolish the current ‘non-dom’ regime as we know it and replace this with a new “modern, simpler and fairer” residence-based regime from 6 April 2025.

The concept of domicile, which has long been a contentious and ‘grey’ area for a number of years will no longer be determinative of the scope of liability to tax from April 2025, although it will continue to be relevant for earlier periods and for other legal purposes. There will be an impact on non-resident trusts and additional reforms to the Inheritance Tax regime.

The key changes proposed are as follows:

 

“FIG (foreign income and gains) regime” for New Arrivers

  • The new FIG regime will apply from 6 April 2025 to ‘new arrivers’ – individuals who have been non-UK resident for 10 consecutive tax years (regardless of domicile status)
  • For the first four tax years of UK residence, there is no tax on FIG arising in this four-year period, even if remitted to the UK. This also applies to distributions/benefits from non-resident trusts
  • UK source income and gains continue to remain taxable, as per the current regime
  • An annual election for the FIG regime must be made for all or any of the eligible four tax years, even if there are periods of absence from the UK within that four-year period
  • Those electing into the FIG regime will lose their personal income tax allowance and CGT annual exemption, as per the current regime. Residence will be determined by applying the provisions of the Statutory Residence Test (SRT), ignoring Treaty residence and split years of arrival/departure

 

Existing UK resident non-doms

  • The last year to claim the remittance basis will be 2024/25.
  • Existing residents who are eligible to claim the FIG regime may do so up to the fourth tax year of residence. This should apply to eligible individuals who moved to the UK after 5 April 2022.
  • Those not eligible for the FIG regime will be subject to tax on their worldwide income and capital gains from 6 April 2025 on an arising basis.
  • Under transitional rules, non-doms who can no longer claim the remittance basis from 6 April 2025 and are not eligible for the FIG regime may reduce their taxable foreign income (not gains) by 50% for one year only in 2025/26.

 

Labour’s response

There is a very real possibility that we will have a Labour government before 2024 is out and the Labour Party have responded to the Conservative Government’s proposals.

Whilst Labour supports most of the proposed replacement to the non-dom rules, including the four-year arrival window and the principle of a ten-year window for IHT, it has suggested that changes need to be made.

Accordingly, it proposes:

  • All foreign assets held in a trust should fall within the scope of UK inheritance tax, whenever they were settled. In its policy paper published alongside the Spring Budget, the Government said that “to provide certainty to affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK IHT regime”. Labour counters that this should have included this in the promised consultation as an option rather than being ruled out.
  • There should not be a 50% discount in the first year of the new rules. Currently the transitional proposal is that there will be a temporary 50% reduction in the personal foreign income subject to tax in 2025-26 for non-doms who will lose access to the remittance basis on 6 April 2025 and are not eligible for the new 4-year foreign income and gains (FIG) exemption regime.
  • There should be consideration as to whether there should be an investment incentive during the four-year arrival window, so that UK investment income is free of UK tax and not disincentivised when compared to investment elsewhere in the world.
  • To address concerns as that FIG left overseas after the two-year Temporary Repatriation Facility closes will face a significant disincentive against its repatriation to the UK, Labour will explore ways to encourage people to remit ‘stockpiled’ FIG to the UK.

So, in summary, Labour has chosen not to accept many of the transitional measures put forward by the current Government, designed to encourage overseas money into the UK. Instead, they argue that the Government’s proposals contain “loopholes” which undermine the fairness of its original proposal.

Also, the Labour statement makes it more complicated to assess options in the run-up to the proposed change in rules in 2025.

 

Need our help?

Please contact us if you would like advice or assistance in respect of any matter referred to above, including:

 

Personal

  • Moving (or returning) to or leaving the UK, including practical considerations under the SRT
  • Scope of liability to IHT and options to mitigate the potential exposure
  • Your historic residence position and eligibility for the new FIG regime from April 2025
  • The impact on your tax position of losing the remittance basis, based on your worldwide assets and affairs and options for mitigating UK tax on the arising basis
  • Calculating potential capital gains tax exposure on the disposal of any assets, considering rebasing and available reliefs

 

Trusts

  • Creating or adding to an excluded property trust and ongoing compliance and UK tax obligations in connection with the settlement
  • Winding up or distributing funds or assets from a non-UK trust or other entities
  • Assessing the income and capital gains position in a non-UK trust
  • Advice on the Transfer of Assets Abroad/attribution of capital gains provisions and available ‘defences’

 

Get in touch with our team via our website, or get in touch with our Trusts Director at michelle.willson@cowgills.co.uk.

Non-dom reform
Disclaimer

The information was correct at time of publishing but may now be out of date.

Tax
Posted by Michelle Willson
23rd May, 2024
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