As things stand, individuals who are both UK domiciled and UK tax resident are subject to UK income tax on their worldwide income and capital gains (subject to mitigations and reliefs designed to avoid double taxation). If someone is UK tax resident but ‘non-dom’ however, they can choose for non-UK income and gains to be taxed on the ‘remittance’ basis for a number of years, meaning they are only taxed on foreign income and gains insofar as they are ‘remitted’ (i.e. brought into) the UK.
Non-doms are also currently only subject to UK inheritance tax (IHT) on their non-UK assets from their fourth year of non-UK residence (provided they meet certain conditions).
The Budget proposals set out a plan to remove ‘domicile’ as the basis for these IHT and income tax tests, replacing the rules with a focus on tax residence. The changes will affect UK domiciles looking to return to the UK as well as non-doms.
Income Tax
From an income tax perspective, it is proposed that the new regime will not be based on domicile and the remittance basis of taxation will be scrapped. The proposal is that, from 6 April 2025, where an individual has been non-UK resident for at least 10 years, a claim under the new foreign income and gains regime will fully exempt foreign income and gains for four years even if remitted to the UK.
A transition period is expected for those arriving in the UK before 6 April 2025 provided they are within their first four years of tax residency in 2025/26 (and were not resident in the UK for at least ten years).
IHT
UK assets held by non-doms are already subject to IHT and no change to this position is expected as highlighted above. Non-UK assets held by non-doms are not within the UK IHT net at the moment however.
The new proposals set out that an individual’s IHT liability in the future will depend on the individual’s residence rather than the domicile. Whether the assets are UK or non-UK will therefore be irrelevant going forward. Broadly it is proposed that, regardless of an individual’s domicile position, if they have 10 years of UK tax residence, the individuals will be subject to UK IHT on their worldwide assets. This will be a significant change for UK based non-doms who don’t currently have their non-UK assets exposed to UK IHT.
It will also have a significant impact on non-dom individuals that leave the UK. This is because the current proposal is that an individual will now continue to have their worldwide assets within the scope of UK IHT for the first ten years after leaving the UK – an exposure to UK IHT that doesn’t currently exist.
Other ‘connecting factors’ are also expected to be taken into account to determine whether the individual is within the scope of the new rules, perhaps making individuals subject to UK IHT on worldwide assets even if they have not been resident in the UK for the ten years.
Further considerations
In addition to the above, a temporary repatriation facility has been proposed to allow those non-doms already using the remittance basis of taxation to remit their pre 6 April 2025 foreign income and gains to the UK between 6 April 2025 and 5 April 2027 and be subject to a 12% flat tax on these remittances.
In addition it has been proposed that personally held foreign assets can be rebased to their 5 April 2019 value (subject to conditions) and that non-doms resident in the UK will only be subject to UK tax on 50% of their foreign income in 2025/26(subject to conditions).
Before the General Election was called, these proposals were already subject to consultation. A potential change of Government has added on an extra layer of uncertainty. Both the main parties have indicated that they intend to move to a residence based system but what exactly the legislation will look like after the election is still to be ironed out. We will continue to monitor the announcements closely to ensure you are aware of the implications of any further proposed changes to the domicile and wider residence rules.
If you have any queries regarding the proposals or like any assistance please contact Diane Nettleton on 01633 653167 or Diane.Nettleton@kilsbywilliams.com. Alternatively, please contact your usual advisor on 01633 810081 or email info@kilsbywilliams.com
