Budget: Reform of the UK’s Non-Dom Regime

There has been much speculation surrounding whether the Spring Budget would include any reforms to the non-dom regime, particularly in view of the Labour Party having already been very clear they would abolish the current regime should they form a government. The Chancellor announced that the current regime will come to an end from 6 April 2025, which also means that the reform of the non-dom regime is not happening in this Parliamentary session. Details of the replacement regime and the implications for Protected Trusts that were announced are more significant and extensive than anyone had expected. 

The non-dom regime will end from 6 April 2025 and, together with it, the concept of domicile and the complex remittance basis rules.

Its replacement will be a residence-based test, which allows individuals relocating to the UK to be taxed only on their UK source income and gains for the first four tax years, with no UK tax on any foreign income and gains arising in those years, even if brought to the UK. To be within this four-year foreign income and gains (FIG) regime, individuals must be within their first four tax years of residence, following a period of 10 tax years consecutive non-UK residence. Individuals who have previously been UK tax resident and then spent time abroad will need to look carefully as to whether they will be eligible. Surprisingly, there is no charge for opting into this regime, ending speculation of the UK adopting a similar annual charge to the other European countries.

With effect from 6 April 2025, after an individual has been resident in the UK for more than four years, they will no longer be eligible for the four-year FIG regime and will be taxable on their worldwide income and gains.

For existing non-doms who are not eligible for the four-year regime (i.e. who will be taxed on an arising basis from 6 April 2025), there will be the following targeted transitional arrangements in place:

• Those transitioning from the remittance basis to the arising basis in 2025/26 will only be taxable on 50 percent of their foreign income in the 2025/26 tax year;
• Those who have previously claimed the remittance basis are able to bring previously unremitted foreign income and gains to the UK at a reduced tax rate of 12 percent for a period of two years beginning on 6 April 2025 – the ‘temporary repatriation facility’; and
• Individuals are able to rebase their assets to their 5 April 2019 value for disposals after 6 April 2025. 

Whilst many predicted changes to the non-dom regime, tackling the impact of any changes on existing Trust structures felt a greater challenge for the Treasury. However, the Spring Budget confirmed that the Trust Protections which came into force from 6 April 2017 will be removed for all foreign income and gains that arise within non-UK trusts after 6 April 2025. The practical impact of this is that all foreign income and gains that arise will be taxed on their UK resident settlors each year. This is a significant change for long-term residents for whom Protected Trusts have been particularly valuable from a UK tax perspective, as well as for asset protection and succession purposes. It will therefore need careful consideration as to how these structures will be taxed going forward.

Changes to the scope of inheritance tax (IHT) to bring it in line with a residence-based test are being consulted upon, although it was confirmed non-UK assets settled into an excluded property trust (EPT) prior to 6 April 2025 will remain outside the scope of IHT, albeit the loss of protections referenced above makes any decision around EPTs more complex. The position appears more complex for those settled post 6 April 2025 and further detail will follow. Our separate article discusses this further.

Overseas Workday Relief (OWR) will be reformed, with eligible employees continuing to be able to claim OWR for the first three years of UK tax residence, but with no restriction on whether or not those earnings may be remitted to the UK. The Government will consult on the eligibility criteria for reformed OWR in due course, though it is understood that new arrivals in the UK from 2025/26 who are not eligible for the new FIG regime will in turn not be eligible for OWR.

Reflecting on the announcements, the obvious question will be where this leaves the UK in terms of attractiveness for international mobility and High Net Worth investors. In recent years, the number of favourable tax regimes for wealthy international individuals has increased, Italy and Portugal being particularly successful examples (with regimes available for 10 years or more). The four years available under the UK’s replacement regime, plus the removal of the Trust Protections, could impact on how the UK sits amongst its competitors in the Ultra-High Net Worth (UHNW) community.

Many will welcome the replacement of the subjective concept of domicile as a basis for taxation, with the much clearer Statutory Residence Test’s residence providing less disputable outcomes, and the introduction of the Temporary Repatriation Facility which should encourage an influx of funds to the UK. However, there are still details to come when the legislation is released and we will be working through this to consider what actions existing non-doms might take now and pre-6 April 2025 in light of the transitional arrangements announced, as well as considering the position for those individuals planning on coming to the UK in the next few years.

Finally, it is important to note that there will be a General Election prior to 31 January 2025 and so there is potential for the regime to change further should there be a new Government in place.  

Please do not hesitate to contact the authors or your usual KPMG in the UK contact to discuss the reforms in further detail.