UK: UK government outlines replacement for non-dom tax regime with new foreign income and gains system

The UK government has unveiled partial details of its plan to replace the resident non-domicile (non-dom) tax regime with a four-year Foreign Income and Gains (FIG) system, effective from April 2025, as reported by STEP.

Since the March 2024 announcement by the previous administration, non-doms have been aware that the remittance basis and the domicile concept would be abolished. On 29th July 2024, Chancellor of the Exchequer Rachel Reeves declared that inheritance tax (IHT) protection for existing trusts settled by non-doms would cease.

A new residence-based IHT regime will be introduced from 6th April 2025. The primary criterion for determining whether non-UK assets are subject to IHT will be if an individual has been UK resident for ten years before the tax year of the chargeable event (including death), with a provision extending the scope to ten years post-departure from the UK. The government acknowledges that existing trusts were established based on current rules and is exploring how to implement these changes while allowing for appropriate adjustments to existing trust arrangements, ensuring equitable treatment of all long-term UK residents for IHT purposes.

The four-year FIG regime will permit individuals who have not been UK residents for the ten years preceding the 2025/26 tax year to remit FIG tax-free to the UK for up to four tax years. The protected trust regime will be abolished from 6th April 2025 for those ineligible for the FIG regime, subjecting settlors to income tax and capital gains tax (CGT) on trust income and gains.

Transitional provisions from the previous government will continue, except for the one-year 50% reduction in foreign income taxation for those in the UK for fewer than 15 years. The temporary repatriation facility (TRF) will be maintained, with details to be disclosed in the Budget on 30 October 2024.

The government will review complex anti-avoidance legislation for offshore trusts, with any changes effective from 6th April 2026 at the earliest. An open consultation on the IHT policy details will not be conducted; instead, stakeholders are invited to submit comments before the Budget in a ‘summer engagement.’ Face-to-face and virtual sessions will be held from 12th August to 23rd August 2024. The new rules, along with transitional arrangements, will be published on 30th October 2024.

STEP has submitted supplementary comments ahead of the Budget, suggesting modifications to ensure fairness and consistency with current rules. They warn of potential negative impacts on individuals deciding to reside or remain in the UK due to retrospective legislation, which could lead to unfair outcomes for those leaving the UK before 6th April 2025 and have never faced worldwide IHT. STEP advocates for retaining the excluded property status for trusts established before this date to avoid penalizing those who set them up under different tax expectations and opposes worldwide IHT for individuals no longer residing in the UK.

Oxford Economics is studying non-doms’ reactions to the proposed tax reforms. Advisors with non-dom clients are encouraged to complete a survey based on their understanding of client reactions. The anonymised results will help Oxford Economics create a research report for HM Treasury as part of the engagement process. Basil Dixon, Partner at Payne Hicks Beach said:

“They have only been in power for three weeks, but Rachel Reeves has just fired the starting gun for what promises to be a hectic 9 months of decision-making and planning for non-doms, who have been in a state of anxious limbo since Jeremy Hunt called time on the non-dom regime last March. The policy paper published on 29 July gives the first proper indication of what the new regime will look like under Labour and whilst we will have to wait until the Autumn Budget for the detail, it looks like much of the Conservative plan has been retained but with certain key elements have been tightened-up.

MOST significantly, as rumoured, Labour are ditching the IHT protections offered by excluded property trusts with this move looking set to cause consternation in the non-dom community, which is already deeply concerned about the expansion of the IHT regime to keep people in scope for ten years after leaving the UK. Unprecedented numbers of non-doms have been looking at leaving the UK. Labour is gambling that they will not. We are about to find out if that call is correct. One thing is for sure though, with only 9 months to make decisions, non-doms need to start planning now. Time and good advice will be at an absolute premium and waiting until the Autumn to get going may be a decision that people end up living to regret.”