13-03-2024
On 6 March, the UK Chancellor announced the end of the non-dom regime as from 6 April 2025. This landmark decision raises a number of questions.
End of the UK non-dom regime. What's next?
On 6 March, the UK Chancellor announced the end of the non-dom regime as from 6 April 2025. Is a 200-year-old party coming to a close? Not sure. Planning options will remain available in the UK. But it is likely that a number of HNWIs and fund managers will consider Switzerland as an alternative.
What we know of the new rules
Although the details are still being worked out, it is understood that newcomers who are resident outside the UK for 10 consecutive years will qualify for full UK tax relief on their overseas income and gains for 4 years. This will allow qualifying individuals to bring their overseas assets into the UK tax free.
For existing non-doms, there will be targeted transitional rules in place for the 2025/26 tax year (their first year of worldwide taxation), effectively reducing the taxable overseas income by 50%. In addition, existing non-doms will be able to remit overseas income and gains arising before 6 April 2025 to the UK in ta years 2025/26 and 2026/27 at a rate of 12%. There will also be a rebasing of capital assets to 5 April 2019 for current non-doms who have claimed the remittance basis and who make disposals after 6 April 2025.
The Spring Budget also confirmed that the trust protections will be removed for all foreign income and gains that arise in non-UK trusts after 6 April 2025. This will have significant tax implications for UK-resident settlors.
Last but not least, the government is also looking for ways to bring the UK Inheritance tax rules in line with a residence-based test. The proposal is that an individual will be taxed on their worldwide assets after a period of 10 years of residence and that such an individual will remain in scope 10 years after becoming a non-UK resident. However, it is proposed that non-UK assets placed in an excluded property trust by a non-UK domiciled individual before to 6 April 2025 will be outside the scope of UK inheritance tax.
Who will be affected?
The population of UK non-doms includes more than 65,000 individuals, ranging from multibillionaires to entrepreneurs, executives and fund managers. For years, the current rules have allowed them to avoid paying UK taxes on their overseas earnings for as long as 15 years and to significantly reduce their UK inheritance tax exposure.
Switzerland as an alternative
While there will still be planning options available in the UK, a number of non-doms will consider relocating to another jurisdiction. For those wishing to remain on the European continent, Switzerland is an option that they will consider, alongside Monaco and Italy, for instance.
With this in mind, we thought it might be useful to have a look the main planning routes available in Switzerland.
The lump sum tax regime
In most cantons, this special regime is available to non-Swiss nationals who do not work in Switzerland. Instead of paying taxes on global income and assets, it uses the taxpayer’s living expenses as a surrogate tax base. Other factors are taken into consideration, such as the rent paid for the Swiss primary residence (or the deemed rental income in the case of ownership).
The main advantage of the lump-sum taxation regime is that it allows foreign nationals to benefit from a significant reduction in Swiss income and net wealth taxes on their foreign assets and income while, at the same time, retaining the right to dispose of these assets.
As long as he or she fulfills the conditions, a taxpayer can benefit from the lump sum tax regime for life.
Ordinary tax regime
The ordinary tax regime can be quite attractive due to very low income and wealth tax rates in certain cantons as well as the general exemption of gains made on the disposal of private movable assets. In some cantons, the maximum income tax rate is in the range of 20% to 22%. On top of this, a number of tax planning options are available under the ordinary tax regime, particularly in a cross-border context. These may include step-up reorganizations, placing assets in trust or other measures to separate the ownership of assets in a tax-efficient manner.
Gift and inheritance taxes
Gift and inheritance taxes are levied solely at the cantonal level. In all cantons, transfers to spouses are exempt, and in most cantons, transfers to the children are also exempt. Some cantons do not levy such taxes at all.
Taking up residence in Switzerland
EU/EFTA nationals are entitled to take up residence in Switzerland, provided that they are financially independent. Additional requirements apply to nationals of non-EU/EFTA countries: depending on the circumstances, the granting of a residence permit may be subject to a minimum tax charge, employment, the establishment of a business or the existence of close ties to Switzerland.
Conclusion
Taking a step back, it is clear that the environment we live in is changing at a rapid pace. Long-term planning is becoming a challenging task. While it is important to monitor the details of specific developments, we should not lose sight of the bigger picture. More than ever, geopolitical, economic and political trends need to be considered before major decisions are made.