Impact of the abolition of the non-dom regime

What is the non-dom tax regime?

The non-dom tax regime dates back to when Income Tax was first introduced in 1799, where residents were only taxed on income arising abroad to the extent that it was received in this country. This was the first incarnation of the ‘remittance basis’ of taxation and was only modified in 1914 where the eligibility was restricted to residents who were not domiciled or not ordinarily resident in the UK.

The ’remittance basis’ regime, used by non-domiciled individuals, has broadly remained the same since the 1900s. There were broad ranging reforms in 2008 and 2017, but the fundamental principles have not changed – that a non-dom is only taxed on their overseas income and capital gains to the extent the monies are brought to or used in the UK.

Since 2017, a non-domiciled individual could elect for the remittance basis of taxation for a period of 15-years. After that period the individual is treated as ‘deemed domiciled’ for taxation purposes and taxed on a worldwide basis. However, a non-dom could establish a non-UK trust before the expiry of their 15-year term, and the trust would be theoretically exempt from UK tax in relation to non-UK sources.

The notion that a person’s domicile should determine their basis of assessment for tax is unusual. In many regards, domicile, which is inherited from your father at birth, is an outdated concept and not easily understood. In recent years, HM Revenue & Customs have raised an increasing number of enquiries to test whether someone is not UK domiciled, and there is a good degree of subjectivity involved.

Why have the Government abolished the non-dom regime?

The UK’s non-dom regime has been hugely popular with wealthy overseas individuals and families, attracted by the generous tax breaks. The non-dom regime was the envy of many European countries, and the likes of Italy, Spain and Portugal created their own versions to attract private wealth to their shores.

There has been a longstanding tension with the non-dom regime; why should a wealthy foreigner pay less tax than someone who was born in the UK. A recent academic study, using HMRC taxpayer data records, suggested that abolishing the non-dom regime would raise over £3bn for HM Treasury.

The Labour Party had made abolishing the non-dom regime a key cornerstone of its tax policy and they pledged to use the tax revenue raised to pay for 7,500 doctors and 10,000 nurses and midwives for the NHS, if elected to Government.

Chancellor Jeremy Hunt took firm aim at Labour’s flagship tax policy by abolishing the non-dom tax regime at the Spring Budget — grabbing hold of the additional £2.7bn tax revenue to partly pay for his 2% National Insurance cut.

This dramatic announcement went against the Chancellor’s previous assertions that such a move would end up costing the UK economy £8bn. But this was clearly a tactical political move in a General Election year to take the wind out of Labour’s sails.

What has actually happened?

From 6 April 2025, the archaic concept of domicile will no longer be relevant for determining an individual’s tax status. Instead, individuals (who have not lived in the UK for the last 10 years) moving to the UK will have a four-year tax holiday and they can freely bring their overseas monies to the UK. This new regime will be much simpler but more limited in time as non-doms currently benefit from a 15-year period where they don’t pay tax on their overseas sources.

Once the individual has been UK resident for more than four years, they will pay tax on their worldwide income and gains.

Non-doms who are already here will be left feeling aggrieved, but transitional rules will allow non-doms to remit overseas monies at a generous 12% flat rate tax over a two-year window (2025/26 and 2026/27). In addition, non-doms who will lose access to the remittance basis from 6 April 2025 will benefit from a 50% reduction in their personal foreign income subject to UK tax in 2025/26. And finally, non-doms who have previously claimed the remittance basis will be able to rebase their overseas assets to value at 5 April 2019, such that for disposals after 6 April 2025, only the increase in value from 2019 will be subject to UK Capital Gains Tax. Clearly, these transitional measures have been introduced to ‘sweeten the pill’ for current non-doms and to avoid a mass overnight exodus.

The rules on non-UK trusts are also radically reformed, as the present Income Tax and Capital Gains Tax protections afforded to such structures will be completely removed. However, the Inheritance Tax benefits of structures established before 6 April 2025 are confirmed to be retained.

Specifically on the topic of Inheritance Tax, the Government ran out of time before the Spring Budget announcement to construct the new rules, and a consultation will be launched in due course to invite stakeholders to provide their input on how Inheritance Tax should be best managed. The headline 40% Inheritance Tax rate is a severe disincentive for individuals to move to the UK and this requires careful consideration. The initial indication from the Government is that after 10 years of UK residence an individual will be subject to Inheritance Tax on worldwide assets.

In conclusion

Without question, the Government’s proposed reforms are a significant simplification and modernise a desperately outdated regime. However, there will be a concern from some that the Government has gone too far by only having a four-year regime and losing its competitive edge compared with countries such as Italy, who have 10-year tax holidays.

And finally, there is no guarantee, in a General Election year, that all of this will happen, and an incoming new Government may shelve the proposals completely or want to design their own version. And even if it were to happen, given the huge amount of work that would be required from HM Treasury to overhaul the current system, I wouldn’t be surprised if everything gets pushed back to 2026 at the earliest.

Would you like to know more?

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