Autumn Budget 2024: key tax changes for non-doms explained

After months of speculation, we finally have solid details on how the government intends to abolish non-dom status and replace it with a residence-based regime. The draft legislation alone amounts to 103 pages, so it will take us some time to work our way through all the implications. We have summarised the key changes below, but while reading, please bear in mind that there are lots of nuances to consider and it will be important to take advice based on your personal circumstances.

Remittance basis

With effect from 6 April 2025, the remittance basis of taxation is abolished. By default, this means that all UK resident individuals will be taxable on their worldwide income and gains in the year in which they arise. The only exception will be for new arrivals to the UK.

Transitional rules will apply to foreign income and gains (FIG) from 6 April 2025 to 5 April 2028. During this period, it will be possible to elect into the temporary repatriation facility (TRF). Taxpayers who have previously been taxed on the remittance basis can choose to designate some or all of their unremitted FIG, which will be taxed at 12% if designated by 5 April 2027 and 15% if designated between 6 April 2027 and 5 April 2028. The designated funds can be brought to the UK at any time without suffering further tax.

The way the TRF is being implemented will allow non-cash assets to be included, meaning that the designated funds can be remitted at any future time with no further tax charge.

For example, Alex used £1m of untaxed foreign income to buy a house in Spain. Alex expects to be in the UK long term and would like access to these funds when the house is eventually sold. By designating the £1m of income, Alex is taxed immediately at 12% but can then bring the proceeds to the UK at any time in the future with no additional remittance charge.

Undesignated FIG will continue to be taxed on remittance under current rules.

Those who have taken advantage of business investment relief (BIR) can either designate the BIR investment, paying 12% or 15%, or continue to apply the BIR rules and remove the funds from the UK when the investment ends.

Overall, the government has clearly listened to concerns raised by RSM and others and made the TRF mechanism as simple as possible. This should encourage more people to make use of the opportunity, especially as the rates chosen are relatively generous. Of course, this is only true if you actually need to use the funds in the UK. If not, you can simply leave your undesignated FIG offshore.

New arrivals

New arrivals to the UK will be eligible for the new tax system covering foreign income and gains, confusingly also called FIG. Upon claim, FIG arising in the first four years of UK tax residence will qualify for 100% tax relief. No UK tax will be payable on these funds, even if they are used in the UK later.

To qualify, individuals will need to have been non-UK resident for the 10 years prior to arrival in the UK. This means that anyone arriving in the UK after 5 April 2022 may qualify for at least one year of the FIG regime.

The new FIG regime represents a new approach to taxing short-term residents. Whereas the remittance basis concentrated on whether funds were used in the UK, FIG looks at how long an individual has been resident here.

The big advantage of FIG is its simplicity. Not all income and gains qualify, so care will need to be taken, but on the whole, it is a welcome change, although we would like to have seen the term extended beyond four years.

Capital Gains Tax

A limited rebasing relief will be available for foreign assets that were held at 5 April 2017 and disposed of after 5 April 2025. There are numerous conditions to be met, the most significant of which is that the owner must have been non-deemed domiciled at 5 April 2025.

Qualifying assets will be rebased for CGT purposes to their market value at 5 April 2017 if the owner chooses.

Inheritance Tax

The abolition of non-dom status means that by default, all long-term UK residents will be subject to Inheritance Tax (IHT) on their worldwide assets. The definition of “long-term resident” is therefore very important. For IHT purposes, an individual will be long-term resident in the UK if they have been resident for at least 10 out of the last 20 tax years immediately preceding the year of charge. Once an individual has been non-resident for 10 consecutive years, they will cease to be taxable on non-UK assets.

For example, Sanjay moved to the UK in 2000/01. He left the UK for a period of three tax years from 2012/13 and has been resident since 2015/16. If Sanjay leaves the UK on 5 April 2025 and does not return, he will have been UK resident for 17 of the previous 20 tax years and is a long-term resident. However, he falls within the transitional rules and therefore will lose his long-term resident status after 3 years of absence, on 6 April 2028.

Anyone who has been resident for 20 years or more will remain subject to IHT on worldwide assets for 10 years following their departure from the UK.

Things get complicated for an individual who ceases to be UK resident after having been resident for between 10 and 20 years. These individuals will remain subject to worldwide IHT for a shorter period equal to the excess residence period beyond 10 years, subject to a minimum three-year tail. For example, an individual who had been UK resident for 12 years will remain within the scope of IHT for three years after leaving.

Importantly, the year count does not begin on 6 April 2025; the residence period takes account of time spent in the UK in the last 20 years, including before 2025/26.

The new rules will not apply to individuals who are non-resident in 2025/26 and either non-UK domiciled or deemed domiciled (in the case of a deemed domiciled individual they will remain subject to IHT for three tax years, under the transitional rules). This means that the 10-year tail will not apply to a non-dom who has been resident in the UK for fewer than 15 years, leaves the UK before 6 April 2025, and does not return.

Unlike the FIG provisions, it seems that the concerns raised by the professions have not been fully addressed by the government with regard to the new IHT rules. The differing definitions of long-term residence for IHT and other taxes may cause confusion, and the complexity of the proposals will catch non-residents out unless they continue to take UK tax advice for many years after leaving the UK.

Trusts

Income tax and CGT

The tax position of offshore trusts without a living settlor is not affected by any of the changes announced. However, the position of trusts with a UK resident settlor will be very different from 6 April 2025.

From that date, unless the settlor qualifies for the new FIG regime, all gains arising to the trust will be taxed on the settlor personally. Income will be taxable on the settlor unless they and their spouse are excluded from any benefit – the definition of benefit is very wide and can still apply even where the settlor and spouse have been excluded in some cases.

Income and gains arising to the trust before 6 April 2025 will continue to be taxed by matching to distributions or other benefits provided to UK resident beneficiaries. Existing motive defences will continue to apply.

IHT

Prior to the budget, there was considerable concern that foreign assets of excluded property trusts would be brought within the scope of IHT from 6 April 2025. In the event, in many cases this will not happen, but there is a sting in the tail.

The default position of assets held in trust from April 2025 will depend on whether the settlor is a long-term resident for IHT purposes when a charge arises. For example, if the settlor has been resident for more than 10 years, then all assets of the trust will be within the scope of IHT. 

There is an important exception for trusts created before 30 October 2024 by a non-deemed domiciled settlor. Non-UK assets held by these trusts prior to 30 October will not be included in the estate of the settlor on death, regardless of the settlor’s personal position at that time.

This exclusion only applies to IHT charges on death. Trusts with a long-term resident settlor will become subject to periodic IHT charges at a rate of up to 6% every 10th anniversary regardless of whether their assets are UK or foreign.

This is actually a more generous position than we had feared and means that existing trust structures will continue to provide significant protection from IHT. However, the position will be more complicated than in the past.

Where the settlor of a trust has died before 6 April 2025, the trust’s IHT status will be based on whether the settlor was a non-dom at the point of settlement; this position has not changed.

In all other cases, the IHT status of the trust will be based on the IHT status of the settlor at the relevant date. This means that the IHT status of a trust can fluctuate as it will follow the IHT status of the settlor.

For example, if the settlor has been UK resident for 20 years on 6 April 2025, all assets of the trust will be subject to periodic IHT charges. If the settlor subsequently leaves the UK, after 10 years of non-UK residence, the foreign assets of the trust revert to being excluded and there will be an exit charge.

If the settlor dies as a long-term UK resident, all assets of the trust remain within the scope of periodic IHT charges.

Currently, investments in qualifying UK businesses and agriculture are fully relieved from IHT. From 6 April 2025, this relief will be capped at £1m and above that level, relief will be restricted to 50%. This means that UK business assets of many offshore trusts will be brought within the scope of IHT periodic and exit charges for the first time.

Statutory residence test

There are no changes to the Statutory Residence Test (SRT) rules. This is important because the replacement to the non-dom system is entirely based on the tests of tax residence, which are now well established.

What should you do?

Individuals

The IHT changes to trusts mean that assets that have already been settled will not automatically be taxed on the death of UK residents. This may be enough to persuade some families to remain in the UK, but for many others, leaving the UK may still be an attractive alternative to being taxed under the new rules.

If you are considering leaving the UK, thought needs to be given to how to achieve this eg how many days can you spend in the UK each year, and where do you plan to settle. Care will be needed by business owners, since leaving the UK could result in companies becoming non-UK tax resident, with significant adverse tax impacts. Even after leaving, many long-term residents (LTRs) will remain subject to IHT for a prolonged period.

For those remaining in the UK, thought should be given to taking advantage of the TRF. This will include consideration of what funds you would like to be able to use in the UK in the future, and which to designate to be taxed.

CGT rebasing will not be relevant to many but needs to be looked at if you are not yet deemed domiciled.

Investments that were previously sheltered from UK tax will now become subject to tax on the arising basis and will need to be restructured. We expect to see lots of family investment companies and offshore insurance bonds being created over the next few months.

Trusts

Trustees and settlors need to prepare for income and gains attribution. Settlors will need accurate information to include on tax returns but will also need to consider how to fund the tax they will have to pay. Restructuring how trust investments are held is likely to be relevant in many cases.

Settlors will need to know whether trusts qualify for the income and CGT motive defences. Without this knowledge, they will not be able to complete tax returns correctly and could pay too much or too little tax.

The TRF will be available on certain distributions received by settlors in the past and on certain distributions made during the TRF period to all beneficiaries. This provides an opportunity for income and gains of the trust to be taxed at the reduced TRF rate of 12%. The mechanics are complex but worth exploring due to significant potential tax savings. In some cases, making distributions to ex-remittance basis users during the TRF period could generate very large tax savings.

The changes to IHT will have significant impacts on offshore trusts. Any trust with a LTR settlor will be affected, even though in most cases IHT will not be payable on death. Trustees will need to take account of the date trusts were created to consider when IHT returns begin to be required and periodic tax charges become payable. Trustees will also need to know when settlors leave the UK and cease to be LTRs, since this will generate exit charges payable by the trust.

Great care will be required where trustees are planning to acquire UK assets, including making loans to UK resident beneficiaries. Advice should be taken before any UK asset acquisition, since it could result in the permanent loss of IHT protection. Where UK business assets are held, trustees will need to decide whether to retain these and suffer IHT, or to sell up, potentially creating a tax charge for any UK resident settlor.

In some cases, it will be appropriate to consider bringing trusts onshore. This will mainly apply to smaller trusts where the benefits of retaining professional offshore trusts are outweighed by the costs.

Conclusion

With so much change on the way, it is easy to get overwhelmed. It is true that many of the new rules will leave non-doms and their trusts worse off, but the legislation includes opportunities as well as risks.

To understand how the new non-dom tax changes may impact you, please get in touch with Rachel de Souza, Andrew Robins or your usual RSM contact.