Non-Dom Tax Status: The New Rules Simplified (Well, Sort Of)

The UK’s Autumn Budget 2024 confirmed sweeping changes to non-domiciled (non-dom) tax status, marking a significant shift in how international wealth is treated. From April 2025, the UK is moving to a system based on residency rather than domicile, with major implications for foreign income, capital gains, and inheritance tax (IHT). Let’s break it down into plain English (with minimal jargon) so you can grasp what’s happening—and what it might mean for you.

What’s Changing?

1. The End of the Remittance Basis
   • The remittance basis regime, which allowed non-doms to keep foreign income and gains untaxed as long as they weren’t brought into the UK, will be scrapped.
   • Replacing it is the “4-Year FIG Regime” (Foreign Income and Gains):
     • For the first four years of UK residency, eligible newcomers can bring foreign income and gains into the UK completely tax-free.
     • After this period, worldwide income and gains will be fully taxable.
     • Importantly, UK investment income is not exempt under this regime.
2. Inheritance Tax (IHT): Residency-Based Rules
   • From April 2025, IHT exposure will no longer be based on domicile. Instead, it will apply to those who become “Long-Term Residents.”
     • You’ll be deemed a Long-Term Resident if you’ve lived in the UK for 10 out of the last 20 tax years.
     • If you meet this criterion, your entire worldwide estate will be subject to IHT at 40%, not just your UK-based assets.
3. Impact on Trusts
   • Trusts set up by non-doms will lose many of their current protections. Key changes include:
     • Income and gains in trusts may now be taxable on the settlor if they are a UK resident.
     • Once the settlor is deemed a Long-Term Resident, the trust fund will be partially subject to IHT.
   • For trusts created before 30 October 2024, some transitional protections apply, but these are limited.
4. Rebasing and Transitional Relief
   • Two transitional measures aim to soften the blow for existing non-doms:
     • Rebasing Relief: Foreign assets held since 2017 can be rebased to their value on 5 April 2025, reducing the taxable gain.
     • Temporary Repatriation Facility (TRF): Allows foreign income and gains accrued before April 2025 to be brought into the UK at a reduced flat tax rate of 12%-15% for three years.

What Stays the Same?

• Double Tax Treaties: The UK’s inheritance tax treaties with certain countries (like India and the US) remain unaffected, offering some relief for dual residents.
• Domicile in Legal Contexts: Domicile will still influence succession law, divorce proceedings, and how some double tax treaties apply.

How Does This Impact You?

For Individuals Moving to the UK

• The new 4-Year FIG Regime is more generous than the current remittance basis in some ways (e.g., full tax exemption on foreign income and gains brought into the UK), but it’s much shorter—only four years compared to a potential 15 under the old system.
• After those four years, your worldwide wealth will be subject to UK taxes.

For Long-Term Residents (10+ Years)

• If you’ve been in the UK for 10 out of 20 years, you’ll become a Long-Term Resident from April 2025, subjecting your worldwide estate to IHT at 40%.
• If you’re already deemed domiciled under existing rules, these changes likely won’t affect you much—but the impact on trusts could still be significant.

For Trustees

• Trusts with non-UK resident settlors might remain unaffected, but those with UK resident settlors need urgent review. Trust income and gains could become taxable, and the IHT protections many trusts relied upon will no longer apply.

What Should You Do?

• Review Your Tax Status
  • If you’re a non-dom, determine how long you’ve been UK resident and whether you’re approaching the 10-year mark for Long-Term Resident status.
• Evaluate Trusts
  • If you’ve set up a trust as a non-dom, review its structure to understand how the new rules will impact it. Consider whether restructuring might mitigate the effects.
• Plan Asset Sales
  • Take advantage of the rebasing relief and transitional tax breaks (e.g., TRF) to clean up foreign income and gains before the new rules take effect.
• Assess Worldwide Wealth
  • If you have significant overseas assets, consider options like gifting, restructuring, or trusts to reduce future IHT exposure.

Final Thoughts

The UK’s shift to a residency-based tax system for non-doms marks a significant change, but it’s not the end of the world. For some, the 4-Year FIG Regime offers a welcome window of opportunity to bring foreign funds into the UK tax-free. For others—particularly long-term residents and trustees—the new rules mean a tougher tax landscape ahead.

The key to navigating these changes is early planning. Understanding your exposure, taking advantage of transitional reliefs, and revisiting your financial structures will help minimise the impact. As always, we’re here to help you make sense of it all—so you can focus on what really matters, like enjoying your four years of tax-free bliss!