After Brexit, it became politically fashionable to “abolish res non-dom”.
As from 6 April 2025, there will almost be no more non-domicile. That means there is one last year of the remittance basis and RND regime.
As ever, the government distinguishes between income tax and capital gains tax (CGT) on one hand and inheritance tax on the other. This is another example of rushed legislation that envisages different regimes for both.
As some of the measures are subject to consultation yet, we will have to wait for draft legislation to fully understand the proposals. The changes will take effect from April 2025 and the next general election must take place by January 2025 at the latest. Considering Labour’s viewpoint on restricting ’Non-Dom’ status though it seems unlikely these proposal will be revoked or substantially amended.
A – Foreign income and gains (FIG) tax.
A ‘Non-Dom’ who commenced UK residence in or before 2021/22 will, from 6 April 2025, be subject to UK taxation on their worldwide FIG. Transitional provisions mean that for 1 year only (i.e. for 2025/26), persons who were eligible for the remittance basis but will not be eligible for the new 4-year regime will only be subject to UK tax on 50% of their foreign income (but not foreign capital gains).
For ‘CGT’ purposes, personally held assets can be re-based to their 5 April 2019 value (not clear why 2019?), provided the taxpayer remains non-UK domiciled and is not yet deemed domiciled at 5 April 2025.
There will be a temporary reduced 12% rate of tax on FIG remitted between 6 April 2025 and 5 April 2027. This provides an incentive for the people who are going to stay to delay any remittance and to remit during those 2 years.
This incentive is only for personal spending in the UK as Business Investment Relief was already incentivising qualifying investments in the UK.
In fact if the taxpayer can meet their UK expenditure requirements from ‘clean capital’ or post-2025 taxed FIG, both of which can be remitted to the UK without triggering any (further) UK tax at all, it still makes sense to keep historic FIG outside the UK.
It will be important to segregate pre-April 2025 FIG from post-April 2025 FIG to prevent unnecessary taxable remittances.
Instead, an individual in their first 4 years of UK tax residence (after at least 10 years of non-UK residence) will be able to elect not to pay UK tax on their FIG. There will be no restrictions on the ability to remit such FIG to the UK.
B – Application to TRUSTS
The protection from income and capital gain tax of Trusts settled by a Non-Dom will be abolished from 6 April 2025, including for trusts created before that date. Instead, the FIG within such a trust will be taxed on a ’non-dom settlor’ on the same basis as UK-domiciled settlors as present”.
UK-domiciled ‘settlors’ are only subject to taxation on income and gains within a trust where that trust is ‘settlor-interested’, i.e. if they, their spouse or (in some cases) their minor children may potentially benefit from it. Existing protected settlements should therefore be reviewed to ascertain whether it may be advantageous to exclude from benefit the ‘settlor’ (and their spouse and minor children) before April 2025 to mitigate the settlor’s UK tax exposure once the new rules take effect.
So far as UK-resident beneficiaries of pre-2025 protected settlements are concerned, they will continue to be subject to UK tax on benefits received from the trust by reference to pre-2025 FIG within the trust. They will, however, no longer be able to claim the remittance basis on such sums.
Trustees should consider making distributions before 6 April 2025 to UK-resident beneficiaries who are currently eligible for the remittance basis.
C- Inheritance tax (IHT)
The changes to inheritance tax remain subject to consultation, though they potentially will have equally wide-ranging.
It is proposed that exposure to IHT on personally held non-UK assets will be moved to a residence-based system instead of the present domicile status. It is envisaged that worldwide exposure to IHT would apply after 10 years of UK residence instead of the current 15 years out of 20 period.
Conversely, it is proposed that worldwide exposure to IHT would cease after 10 years of non-UK residence. This would be a significant increase compared to the current four-year period of non-UK residence for a deemed domiciled person.
It is also proposed that any trust settled by a non-dom before 6 April 2025 will continue to benefit from permanent ‘excluded property status’, which creates an incentive for any non-dom to settle a trust before April 2025. Going forwards, any trusts settled by family members who are both non-dom and non-UK resident may be particularly important planning vehicles where there are also UK-resident family members wishing to minimise their own IHT exposure.
Action points
What should a UK-resident non-dom do now?
- Where possible, consider declaring dividends or realising capital gains on non-UK assets before 6 April 2025 and keep the sums outside the UK, these can be received free of UK tax.
- Defer making remittances of your pre-April 2025 FIG until after 5 April 2025 (but before 6 April 2027), in order to benefit from the reduced 12% rate of taxation, as opposed to up to 45% on income and 24% on capital gains.
- Make arrangements for your post-April 2025 FIG (fully taxed) to be separated from your pre-April 2025 FIG on which you previously claimed the remittance basis, as remitting the latter will result in a UK tax charge.
- Review any protected settlements to determine whether it may be desirable to exclude the settlor, their spouse and minor children from benefit before 6 April 2025 to avoid the settlor being subject to UK tax on FIG within the trust on an arising basis.
- Consider making trust distributions before 6 April 2025 to UK resident beneficiaries who are currently eligible for the remittance basis.
- Consider establishing a trust before 6 April 2025 to shelter your non-UK assets from IHT.
- Consider setting up a Life Insurance Policy inside a Trust before 6 April 2025 to shelter both Income, Gains and IHT, with the benefit of receiving annually tax free 5% of the initial investment made.
A bespoke advice is always the most effective practice to ensure you are in the best possible position and at Vera Group our Tax Team will be delighted to assist you with this.
Email us at: info@veragroupltd.com or call us 02074346000