Current remittance basis rules for non doms will be abolished from 6 April 2025 and switched to a ‘system based on tax residence’
The Chancellor acted on plans to end the current ‘loophole’ tax regime for non doms with the introduction of inheritance tax on worldwide assets after 10-year period in the UK as a non dom and a system in line with the statutory residence test, replacing the remittance basis of taxation, which is based on domicile status.
From 2025, the system will give arrivals to the UK 100% relief on foreign income and gains (FIG) in the first four years of tax residence. They also should not have been a resident in the UK for any period over the 10 years prior to entering the country.
Chancellor Rachel Reeves told MPs: ‘The Budget is closing loopholes in the tax system, including replacing the non-dom tax regime with a new residence-based system to make sure that everyone who makes their home in the UK pays their taxes here.’
Under the current wider statutory residence test (SRT), if you’ve been in the UK for 183 or more days you will be a UK resident.
An individual cannot qualify if they have been UK resident under the SRT in any of the 10 years prior to arrival (for tax years 2013 to 2014 onwards). Treaty residence elsewhere under a Double Taxation Agreement (DTA) tie-breaker will not be relevant for the purpose of determining eligibility.
The DTA would not enable an individual to be treated as non-UK resident for the purposes of qualifying for the four-year FIG regime.
However, the newly introduced residence-based system is coming under fire from some commentators who say there needs to be a ‘non-dom system that works’.
Of the total 83,800 non-domiciled residents in the UK, just 14,800 will be able to take advantage of the four-year FIG regime.
It estimated that 9,300 individuals will not qualify for the four-year FIG regime, which will leave them liable to pay tax on all foreign income and gains after 6 April 2025. This will also apply to overseas trusts.
The Treasury claimed the changes would ‘improve the tax experience of 10,800 non-domiciled PAYE employees as they will no longer have to keep part of their employment income offshore to benefit from the relief’.
Although the draft legislation has now been released, the government still has time to create a new non-dom system that works for internationally mobile individuals.
‘Making sure Britain remains globally competitive and doesn’t lose out to other countries should be a key consideration.
‘There seems to have been a realisation over the last few months that non doms do make a significant contribution to the UK economy and tax base. It’s important that the government ensures the tax changes don’t motivate those people to leave.’
Anyone who does not qualify for FIG will have to pay tax on their foreign income and gains.
The 50% discount on foreign income will be removed from April 2025, as well as becoming chargeable to inheritance tax (IHT), this will apply to non doms who have been in the UK for 10 years or more.
Some claim this will lead to a mass departure of non doms from the UK before April 2025.
The new rules will impose UK inheritance tax on worldwide assets not just while the taxpayer remains in the UK but also for 10 years after their departure.
‘Non doms have until April 2025 to become non-UK resident to avoid being caught by the new 10-year tail.
‘Delaying their departure by just one year will prolong their UK inheritance tax exposure by seven years, so elderly non doms at risk of surviving until 6 April 2028 but not until 6 April 2035 have a particularly strong incentive to leave the UK within the next five months.’
It is worth noting that a similar system was introduced in Japan in 2018, which was cancelled just one year after it was introduced.
Labour seems to have largely adopted what they had proposed previously.
‘This includes no grandfathering for trusts that were IHT protected, meaning foreigners resident in the UK for 10 years will be fully exposed to IHT – including those that settled trusts that were IHT exempt under current law.
‘I fully expect that this news will hasten the exit for many non doms that were advised to postpone any moves until after this Budget. Labour has ignored those that have warned that this move would eviscerate the non-dom tax base.’
The changes will cost HMRC £30m to implement, update IT systems and hire additional staff to manage compliance, but it is expected to raise an additional £5-6bn of tax a year, although it is dependent on the behaviours of a highly mobile group of high net worth individuals.
Over the last five years non doms paid £57.5bn in tax, but with the new rules this is only predicted to increase by £4.2bn in by 2026/27, then climbing to £6bn a year later.
HMT/HMRC policy paper!