Budget update – sunset for the non-doms?

What has happened since March?

A lot has happened in last 11 weeks.  Four things in particular:

Labour’s response

Labour were swift to give their response to the Budget announcements.  What is of particular note is that they did not say that they disagreed with the general premise of the new rules, nor that they would introduce something completely different.  Rather, they indicated that they would broadly keep the Tories’ changes (indeed, there were claims that they had stolen some of Labour’s ideas), but with a few material adjustments, which are mentioned below.

Consultation process

In the second half of May, HMRC started consulting the public about the non-dom changes and many tax professionals and professional bodies provided detailed comment and recommendations.  The Chartered Institute of Taxation, in particular, made some interesting and pragmatic suggestions for implementation of / adjustment to the proposals. 

Rumours of a change of tack by the Tories

Whether off the back of the first wave of feedback and consultations, or whether because of other research or recalculations of the amount of additional tax that their changes would generate, rumours began to circulate that the Tories might switch the “four-year tax-free foreign income & gains” regime to something more akin to the Italian system: a regime requiring an annual payment in exchange for being able to receive foreign income and gains tax-free for a longer period – perhaps 10 years.  Nothing formal was announced and the rumours were superseded by what happened on 22^nd May.

General Election announced – 4^th July

Following press coverage of an unexpected fall in inflation, on 22^nd May Rishi Sunak announced that there will be a General Election on 4^th July.  One consequence of this is that there will be about a week to push through any outstanding legislation that is still waiting to go through Parliament.  We already have one Finance Bill and this may well be passed (perhaps with any controversial elements removed so that consensus can be achieved).

The present Finance Bill does not contain any of the non-dom changes and we have no draft legislation for them – HMRC had not even finished their consultations with the public. The likelihood of there now being a further Finance Bill which is passed by Parliament before it is dissolved, or the non-dom changes being included in the present Finance Bill are slim, at best.

What is more likely is that it will be agreed that there is not time to settle on what the new rules should be and it will be left to the new Government (probably Labour, or a coalition of Labour and others) to formulate the new tax code. In a way, this is a better outcome than having rushed ill-thought-through legislation which then (a) needs to have errors and oversights corrected and (b) will inevitably be altered in many respects by Labour. 

Where does this leave us?

I have assumed that the polls are not entirely wrong that Labour or a Labour coalition will form the next Government.  It will be longer before we have a formal announcement from Labour (probably in an Autumn Statement) about what they propose as the replacement for the “remittance basis” system, so that they have time to think about it properly, without the pressure of an imminent election.

It is now doubtful that the new system will be introduced for tax year 2025/26, as that does not give Labour enough time to prepare draft legislation and get it through Parliament and still give taxpayers enough time to make appropriate arrangements, should they decide that they no longer want to remain UK resident. 

More likely, the replacement of the remittance basis and the changes to the IHT system for non-doms (and their trusts) will both come in at the same time – perhaps April 2026.  That would make more sense than making some changes in April 2025 and others in April 2026.

What might Labour do?

We have had no formal comprehensive announcement about what changes Labour would make if the Tories’ changes do not come into law.  We do have an inkling, though, based on their responses to Jeremy Hunt’s proposals, as it has been said that these were broadly a copy of what Labour had previously said that they would do. 

Labour’s response was to go further than the Tories in several respects and, if one were looking for a guide as to what will eventually come to pass, one might well look at the proposals in the Budget, as adjusted by Labour’s comments.  The key differences between the parties were

1. Non-dom trusts (“excluded property trusts”)

1. What the Tories said:

Trusts which are established under the present non-dom regime (typically where a non-UK domiciled individual establishes a trust, which then holds non-UK assets) will continue to be outside the scope of inheritance tax (IHT).  This would also be the case for trusts established between now and 5^th April 2026.  The IHT rules were due to change from 6^th April 2026.

2. What Labour said:

Those trusts will fall back within the scope of IHT once the settlor has exceeded their “10 years of UK residence”.

Comment: This is similar to how trusts established by “formerly-domiciled residents” are subject to IHT, so there is precedent for this.  Settlors and trustees may need to decide whether it is still worth retaining their trusts at all, or whether to wind them up before the new rules come in.  Some issues might be avoided by excluding the settlor from a trust, but whether this is sufficient will depend on a number of factors, including how long it is expected that the trust will continue to run.

2. Remittance basis – the first year’s income under new rules

1. What the Tories said:

For those who had been claiming the remittance basis, but find that they do not qualify for the new “foreign income and gains” (FIG) regime, they would be taxed on only 50% of their non-UK income in the first year of the FIG regime.

2. Labour said:

Those individuals will not be given that 50% allowance.

Comment: Both options seem somewhat arbitrary.  An alternative might be to allow all those who would have qualified for the remittance basis during the first year of the FIG regime to qualify for the FIG regime anyway, but Labour seem unlikely to allow this concession. 

3. Incentivising remittance of foreign income and gains

1. What the Tories said:

There would be a “temporary repatriation facility” (TRF) for the first two tax years of the FIG regime. Under the TRF, those who had claimed the remittance basis previously will be able to remit their foreign income and gains to the UK subject to a tax charge of only 12% (instead of their marginal income tax or capital gains tax rates (which could be 45% or 20% respectively – 28% for gains relating to residential property).  The purpose of this reduction in tax rate is to encourage individuals to bring that money into the UK.

2. What Labour said:

That will not be sufficient to encourage the remittance of large amounts of remittance basis income and gains to the UK. 

They are already considering a facility for those within the FIG regime to invest in the UK without a tax charge on the income and gains arising on those investments.  There will no doubt be some limitation on the permitted investments in this regard. 

It may be that Labour will extend this facility to anyone with remittance basis income and gains to remit (there is a similar rule under the present regime).

Comment: Labour’s proposal could potentially be very valuable: the income and gains arising from these investments would be tax-free (and not subject to the remittance basis), even though arising within the UK.  Extending this to individuals who are not eligible for the FIG regime would also be very beneficial.  The key will be to ensure that the scope of permitted investments is sufficiently wide for this to be a realistic incentive. 

Planning now

It is difficult to plan when one does not know the rules.  Nevertheless, it is clear in which direction the rules are going and it could be sensible to be alive to the potential risks, so that it is easier and quicker to make changes once we have more detail. 

Many non-doms would be well advised to keep their ear close to the ground and get advice promptly once anything about the non-dom changes is announced after the General Election.  Those for whom this could be particularly relevant are:

• non-doms who claim the remittance basis and may not be able to benefit under a “residence-based” regime (which could be as short as four years)
• non-doms worried about their non-UK estate becoming subject to IHT – possibly after being UK resident for 10 years
• UK resident settlors of trusts which are outside the scope of IHT or which currently have “protected status”.

Indeed, some non-doms who are flexible as to where they spend their time, and who think that they will lose out under whatever regime replaces the remittance basis, are already making contingency plans so that they can cease to be UK resident at relatively short notice, if need be. 

Getting in touch

If you would like to discuss how you might be affected by any of the anticipated changes to the “non-dom rules”, please do get in touch with a member of the team.