On Thursday, 4 July 2024, the UK General Election was held, resulting in the Labour Party’s first victory since 2005.

The Labour Party has pledged to implement the 4-year Foreign Income and Gains (‘FIG’) regime announced by the previous government in the Spring Budget.

Further, on 29 July, the new Chancellor, Rachel Reeves, delivered her first speech, and a new policy paper covering the government's approach to the non-domiciled (‘non-dom’) rules was published. The new government is committed to changing the non-dom regime as a means of increasing tax revenue.

What is a ‘non-dom’?

‘Non-dom’ is a term used for UK residents whose domicile or permanent home is considered to be outside the UK for tax purposes. The term is not related to a UK resident’s nationality or citizenship. Although these residents live in the UK, it is not permanently or indefinitely.

According to data published by HM Revenue & Customs, approximately 74,000 people claimed a non-dom status in 2022-2023. Of these, more than 1 in 10 adults lived in and around London.

The Current Regime

The taxation regime applied to non-dom status is special. Specifically, non-doms are taxed in the UK only on their earnings made within the UK. This means that any money earned elsewhere in the world is not taxed by the UK government until the funds are remitted to the UK. This is known as the remittance basis of taxation.

Similarly, for inheritance tax purposes (‘IHT’), only assets situated in the UK fall within the scope. For income tax, this regime means that only UK rental and trading income is taxable by the UK. For capital gains tax (‘CGT’) purposes, only the disposal of UK real estate is subject to taxation.  

The current regime underwent a major change back in 2017. These changes introduced a ‘deemed-dom’ status, which imposes a 15-year cap that limits the number of years a non-dom can benefit from taxation on a remittance basis.

Under the current regime, when someone loses their non-dom status for tax purposes, their worldwide income, gains, and assets fall within the scope of income tax, CGT, and IHT.

Importantly, however, before an individual loses their non-dom status, the current system -effective until 6 April 2025- allows the creation of ‘protected settlement’ trusts. These trusts mitigate the impact of the changes by allowing the settlor to roll up their income and gains in the trust indefinitely without any tax charges until distributions are made to UK resident beneficiaries.

This current regime is set to be replaced from 6 April 2025 to ensure that everyone who is a long-term resident in the UK pays their taxes in the UK.

‍The New Proposed Regime: the 4-year Foreign Income and Gains Regime

Initially, in the Spring Budget 2024 presented on 6 March 2024, the previous Conservative government announced its plans to phase out the current non-dom regime to make the UK a fair and competitive tax regime internationally.

Before coming into power, on 9 April 2024, the Labour Party indicated their determination to implement changes to the non-dom regime. After taking office, the newly elected government published its first policy paper on changes to the taxation of non-dom individuals.

‍New Residence-Based Regime for Foreign Income and Gains

Accordingly, individuals who first move to the UK or have been non-UK resident for tax purposes for a minimum of 10 years will be able to benefit from the current special regime for only the first 4 years of their tax residency, rather than the 15 years applied under the current regime for their foreign income and gains (‘FIG’). In simpler terms, during the first 4 years, an individual can choose not to pay tax on their non-UK source income and gains and remit those funds to the UK without triggering a tax charge. However, after the 4-year period they will be taxed on their worldwide income and gains without any special treatment.

Furthermore, any protection previously offered through protected settlement trust structures will no longer be available for non-dom or deemed-dom individuals who do not qualify for the 4-year FIG regime.  

‍Transitional Arrangements

For individuals who were already UK residents, the previous proposals included certain transitional arrangements. While some of these transitional arrangements have been kept by the new government, others have been ruled out.

• Reduced Tax Rate

The initial proposal allowed existing remittance basis users who were ineligible for the FIG as of 6 April 2025, to be taxed on only 50% of their foreign income during the 2025/2026 tax year. However, the newly elected Labour government announced in its policy paper that it will not apply this reduced tax rate. Instead, it will subject the ineligible UK residents’ foreign gains to CGT in the normal way, subject to any reliefs such as double tax treaty reliefs.

• Temporary Repatriation Facility (‘TRF’)

As part of the modernisation effort to make the UK a competitive tax regime globally and to encourage both non-doms to bring their wealth earned overseas to the UK during the current regime, a new TRF will be introduced.

In other words, the TRF will allow individuals who were benefitting from taxation on a remittance basis to subject their overseas-earned wealth, brought to the UK, to a reduced tax rate. The applicable rate and the duration for which the TRF will be announced in the Budget.

• Capital Gains Tax Rebasing

The capital gains tax rebasing proposed by the previous government has been retained by the new government. It will allow current and former remittance basis taxpayers who are not eligible for the FIG to rebase their foreign assets to their value on a specific date. Accordingly, this could reduce the chargeable gain if a foreign asset is disposed of on or after 6 April 2025, provided the individual is not eligible for the FIG. The new rebasing date will be announced in the Budget.

• Inheritance Tax  

The current domicile-based inheritance tax (‘IHT’) regime will also be replaced with a new residence-based system from 6 April 2025. Under the current regime, if a person is either UK domiciled or deemed domiciled, they are subject to IHT on their worldwide estate. Conversely, if a person is neither UK domiciled nor deemed domiciled then, is generally liable to IHT only for property situated in the UK.

Under the proposed regime, residency will become the determining factor for IHT purposes. Specifically, a person will be subject to IHT if they have been a UK resident for 10 years prior to the tax year in which the chargeable event, including death, occurs. Additionally, the individual will continue to remain within the scope of the IHT rules for 10 more years after leaving the UK. This is a significant extension, considering that under the current regime, a person continues to be deemed domiciled only for the first 3-years of non-residence.

Any IHT charges arising from deaths occurring prior to 6 April 2025 will continue to be subject to the current domicile regime.

Fair vs Attractive  

The government’s primary drive behind the reform has been to address unfairness in the tax system, ensuring that everyone who is a long-term resident in the UK pays their taxes in the UK. Consequently, the government increases its tax revenue.

Since the announcement of the changes in the Spring Budget in March 2024, UK non-doms have been considering their options. In contrast to the tightening measures in the UK, Italy has been moving in the opposite direction with the introduction of the special tax regime for high-net-worth individuals (‘HNWIs’) in 2017.

For those looking to realise a large gain, the new regime might appear attractive as they could move to the UK and avoid taxes on any non-UK gains provided, these gains were realised within the first 4-year of UK residency. However, the sustainability of generating tax revenue for the government is questionable, as individuals could leave the UK again after the 4-year period.

Confirmation and details of the new rules are set to be published in the Budget on 30 October 2024.

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