The much-awaited government proposal on changes to the tax regime for non-doms and the trustees of their trusts is out!

It seems a long time since the Conservatives announced their proposed changes to the taxation of “non-doms” (those who claim not to be domiciled in the UK) in the Spring Budget.  We have, this week, now heard from the newly-elected Labour government about whether they intend to follow what was previously discussed.  In short, yes they do.  Importantly, most of the changes are due to be introduced from 6 April 2025.

In their announcement, they say that the new rules are intended to “address unfairness”, make the UK “internationally competitive” and “attract the best talent and investment to the UK”.  Whether they will achieve this will take some years to determine, but we have set out below the key take-aways:

1. Out with “domicile”. In with “long-term UK residence”

The subjective concept of “domicile” as a basis for taxation will be dropped.  Instead, we will have to look at the more objective concept of a person’s history of UK tax residence.  In most cases, this will provide much more certainty about the extent to which a person is within the scope of the UK tax regime.

The main point here is that benefit tax treatment only comes after 10 years of non-UK residence.

2. Out with the “remittance basis”. In with the “FIG regime”

Labour are going ahead with the new “foreign income and gains” (FIG) regime that was mentioned in the Spring Budget.  FIG are generally income and gains which arise outside the UK.  

Under the FIG regime, a person may choose not to be taxed on their non-UK income and gains at all in the first four years from coming to the UK (after 10 years of non-UK residence).  There will be some special rules, in particular in relation to employment income.

The FIG will simply not be taxable in the UK and can then be “remitted” to the UK (ie brought to the UK or used in the UK) without any tax charge.

The FIG regime will be available for four years – probably consecutive years, starting with the first year of UK residence.  This is a substantial reduction from the 15 years that is permissible for most non-doms at the moment.

As mentioned, the regime will only be available where the individual had not been resident in the UK in any of the 10 consecutive tax years immediately prior to taking up UK residence.

Labour have confirmed that there will be no special 50% reduction in the amount of foreign income which is taxed in the first year of the FIG regime.

There will be more to follow on this, as Labour say that this is not the final picture and they are reviewing some aspects of their proposal to ensure that the regime is “fair and as competitive as possible”.

3. Transitional rules

For those who have used the remittance basis before, special rules will apply to the FIG on which they had claimed the remittance basis before 6 April 2025:

• This income / gains will still be taxable when remitted to the UK, even if the individual is a FIG regime user at the time.
• There will be a “Temporary Repatriation Facility” (TRF) for a “limited time period” to enable them to remit that income / gains to the UK at a “reduced rate”. 

The idea is to encourage people to remit this money and pay some tax, rather than keeping it abroad forever and never paying any tax on it.  The Conservatives had proposed a reduced tax rate of 12% on any such remittances for just the first two years of the FIG regime. Labour has yet to confirm the rate and the length of time it will be available.

There may be some form of TRF relating to income and gains which have arisen in offshore trusts, but Labour are looking into this further.

4. Other income tax rules for trusts

Currently, an offshore trust may have “protected” status where the settlor is non-UK domiciled and not yet “deemed domiciled”.  In many cases, this avoids the settlor being taxed on the trust’s income and capital gains under one of several different sets of anti-avoidance rules. 

Labour intend to remove this protection where the settlor does not qualify for the FIG regime, with the result that the settlor will taxed on all of the trust’s income where the trust is “settlor-interested”.  It is thought that this will extend to other legislation which can attribute income and capital gains to the settlor in the tax year in which it arises.  There may be more substantive changes to “modernise” these anti-avoidance rules, but this will not happen before 6 April 2026.

5. Inheritance tax

This too is due to change from 6 April 2025.  Interestingly, this is a year earlier than the Tories intended to make these changes.

Once again, someone who has been non-UK resident for 10 years will initially have only their UK assets subject to IHT.  Once they have become UK resident, their worldwide estate will fall within the scope of IHT after 10 years.  Once caught, they will then have to become non-resident for 10 years before their non-UK assets will be free from IHT again.

Labour admit that they need to consider these rules further and there will be a consultation process before they settle on exactly how these rules should operate.

6. IHT and trusts

Where a trust has been established by a non-dom settlor (before 6 April 2025), IHT does not apply to the trust’s non-UK assets (with a few exceptions). 

From 6 April 2025, it appears that if that settlor later falls within the scope of IHT under the new rules (because they have being living in the UK for 10 years), then the whole of the trust that they have set up will be within the scope of IHT as well. 

This has implications not just for the trust itself (which will become subject to the ordinary IHT regime for trusts), but also for a settlor who is able to benefit from the trust (and who, for IHT purposes, will be treated as still owning all of the trust’s assets).

The government says that they will ensure that they allow sufficient time for existing trusts to be adjusted in the light of the rules.  It is not clear whether this means that those trusts that are affected will not suffer adverse taxation until a later date (some form of transitional provisions), or whether they mean that they will try to give those involved enough notice of the rules in order to make adjustments before 6 April 2025.

Again, more detail to follow.

Planning now

It is difficult to plan when we do not have the final version of the rules with all the detail, but at least we now have more certainty that (a) the rules will change and (b) (mostly) they will change from next April, with the result that (amongst other things) settlors of existing trusts who live in or move to the UK will eventually be caught by the rules, as will those trusts.

However, since we know the fundamentals of the proposed rules, those who may be affected can begin to take preliminary advice about areas of risk and possible course of action, even if that action is postponed until after the Spring Budget, when we should have much more detail.

Those who are likely to be particularly affected and ought to consider getting advice are:

• anyone intending to become UK resident for the first time – do they want to benefit from the FIG regime?
• anyone becoming UK resident for a second time – ie after a gap of non-UK residence: will they still qualify for beneficial tax treatment?
• anyone who has claimed the remittance basis in the past – there may be a tempting opportunity to remit previous income and gains
• UK resident non-doms who had hoped to continue claiming the remittance basis: will they qualify for the FIG regime? And what if they do not?
• non-doms worried about their non-UK estate becoming subject to IHT – when will this happen?
• long-term UK resident non-doms who are planning on leaving the UK after 5 April 2025 – when will they be outside IHT again?
• trustees and UK resident settlors of trusts which are currently outside the scope of IHT or have “protected status” – how will the way they are taxed change from April 2025?

Getting in touch

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