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AAB Group / Blog / Non-Dom Tax Status Abolished But A New 4 Year Residence Scheme May Soften The Blow
BLOG7th Mar 2024
By Non-Dom Tax Status Abolished But A New 4 Year Residence Scheme May Soften The Blow
or reach out to a member of our Tax Investigations, International, Private Client team.
Updated: 3rd June
For someone who has been working in tax for several years, non-domicile tax status and the UK tax breaks this provides has always been a controversial tax policy, no matter what government has been in power and no matter how well the UK economy has performed.
It was originally introduced by William Pitt in 1799, to eliminate UK wartime taxes for those with foreign property, very much at a time when many resided in overseas colonies. Whilst there may have been justification for this tax policy at that time, many have suggested this no longer holds any place in modern Britain. Perhaps because he simply had no choice in terms of exploring new ways to generate additional tax revenue for the UK, or maybe because he knew a Labour election victory would inevitably lead to this, Jeremy Hunt used the 2024 Spring budget to announce the abolishment of non-dom tax status, effective from 6 April 2025. This closes the window (and perhaps some of the controversy), on a tax scheme that lasted over 225 years.
As a reminder, ‘non-dom’ tax status essentially allows qualifying individuals a legislative method of sheltering overseas income, gains and assets from UK taxes for up to 15 years of tax residence. Yes, there is an annual tax charge of £30,000 after 7 years of tax residence, rising to £60,000 after 12 years, but for many wealthy non-doms, this still represented significant UK tax savings compared to paying tax on all overseas income and gains arising in each tax year.
Our previous article connected to the Conservative government’s 2024 Spring budget outlined the proposed changes for non-doms and new residents in the UK.
This article highlighted existing questions around timing of implementation and in particular the lack of clarity related to Inheritance Tax changes.
The 4th July election announcement, has unfortunately led to even more uncertainty for UK resident, non-domiciled individuals.
Given both major parties are committed to amending the tax position for non-doms, we are fairly certain that the tax landscape for non-doms will still change. The exact tax policy and timing is now however, even more unclear.
The position so far is as follows:
Both Conservative and Labour policies rely on spending plans associated with expected tax generated by the abolishment of non-dom tax regime and so it’s likely a question of when, not if, any draft legislation is going to be presented to parliament. Knowing both major parties need this tax revenue, It’s possible that civil servants are still working on proposed legislation behind the scenes, which means it is perhaps unwise to assume that non-dom reform will be significantly delayed.
Key to mitigating future UK tax exposure, will be the ability to act quickly once legislation is clear and so we still recommend that affected individuals start planning early for the changes which may come, setting out potential plans and realistic options now. This will in turn, allow for a swift and agile response once the political and legislative landscape is clear.
The current non-dom tax regime allows individuals to choose either the remittance basis of assessment (ringfencing tax due on overseas sources actually remitted, or paid to the UK) or the arising basis, where in accordance with all UK domiciled individuals, you are then taxed on sources as they arise, irrespective of being paid into the UK.
Jeremy Hunt has now confirmed that non-dom tax status is abolished with effect from 6 April 2025. This will remove the ability to claim the remittance basis of assessment and non-doms must now pay tax on their worldwide income.
Given the significant impact on those involved, the government have confirmed transitional arrangements for existing non-doms:
For those arriving in the UK who have previously been non UK resident for 10 consecutive years, there is a new, regime available for all new foreign income and gains (FIG). It allows FIG sources that arise after 6th April 2025, to be brought to the UK without any additional tax charge for the first four years.
Existing UK residents, who have been resident for fewer than four tax years and are eligible for this scheme, will also benefit from the relief until the end of the 4th year of residence.
This would appear to provide a far simpler and attractive scheme, which may in turn, encourage many High Net Worth individuals with overseas assets/income to consider relocating to the UK, at least for four years, without having to pay tax on their worldwide income.
Domicile status dictates your liability to UK Inheritance Tax (IHT) and so it follows that abolishing non-dom tax status, will very much impact the potential exposure to UK IHT. The Government have recognised this and intend to consult on the best way forward, likely moving towards a tax residence-based regime.
Note however, that to provide some certainty to those affected, it has been confirmed that the current tax position connected to non UK assets settled into a trust by a non-dom before 6th April 2025 will not change, i.e. these assets will remain outside the scope of the UK IHT regime.
If you are affected by the change in tax law for non-doms, it is important that you are firstly aware of the changes and potential UK tax impact and secondly you take advantage of any transitional reliefs available to mitigate your UK tax exposure. Non-dom tax status and the remittance basis are notoriously complex and needs careful management to ensure reporting is both correct and tax efficient.
Our Private Client International Tax team have significant experience in this area of UK tax law and are perfectly placed to help with any UK residence or non-dom aspects. Please do not hesitate to get in touch with Lynn Gracie, Gunhild Dam, or your usual AAB contact if you would like to discuss how we can help.
How AAB can help
Our team support a diverse array of individuals such as employed professionals, business owners, families and international sports stars. As AAB clients, they all benefit from absolute confidentiality and share a unified goal of optimising and safeguarding their personal wealth. Our services extend far beyond mere tax return completion. In addition to standard personal tax compliance, our dedicated team of personal tax specialists delivers dependable and practical tax advice, ensuring full compliance and optimal positioning.
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Private Client International Tax Director