Moving to the UK - Update on UK Non-Dom Regime Reforms

Earlier this year, both the Labour and Conservative parties committed to ending the non-dom tax regime. With Labour's election victory on 4 July, their version of the reforms will now be implemented.

This article provides an overview of the proposed reforms, focusing on their implications for individuals considering moving to the UK.

It should be noted that none of these proposals have been finalised as of the date of publication, and there could be significant changes before new legislation are enacted.

Background: The UK's Current Non-Dom Tax Regime

Under the current regime, non-doms can elect to be taxed on the remittance basis, paying UK tax only on their UK income and gains.

Foreign income and gains are taxed only when brought into the UK. A remittance basis charge applies after seven years of residency.

After being a UK tax resident for 15 of the last 20 tax years, non-doms become “deemed domiciled” for tax purposes and are subject to UK tax on their worldwide assets.

The Proposed Regime: Key Changes

While the precise scope of the new rules is still to be determined, the current proposals can be summarised as follows:

New Four-Year Income and Gains (FIG) Regime

• Remittance Basis Abolished: The remittance basis will be replaced from 6 April 2025.
• New FIG Regime: Eligible individuals moving to UK will be able to access a Four-Year Foreign Income and Gains (FIG) Regime, exempting them from UK tax on foreign income and gains for first four years of UK tax residence.
• FIG Eligibility: Individuals must have been non-UK residents for at least ten consecutive tax years to qualify for the FIG regime upon moving to the UK.
• Transitional Reliefs: Existing UK resident non-doms can repatriate accumulated foreign income and gains at a reduced rate of 12% for 2025-26 and 2026-27 (possibly further reliefs for later remittances will be introduced). Existing UK resident non-doms who have previously claimed the remittance basis can also choose to rebase assets to 6 April 2019 value instead of its original cost for calculating capital gains if sold after 6 April 2025.
• Drawbacks: Shorter regime than current system. Claiming FIG may result in losing entitlement to income tax personal allowances and the capital gains tax annual exempt amount. Capital losses may not be allowable in the four years. After 4 years worldwide taxation applies, including trust income/gains of any settlor-interest trusts.

Overseas Workday Relief (OWR)

Overseas Workday Relief (OWR) enables non-dom employees moving to UK to minimise income tax on salary/bonuses attributable to work performed overseas. Alongside the proposals for non-dom reform, it was announced that OWR would also be updated, with individuals eligible for the FIG regime also able to claim OWR for the first three years of UK tax residence, but with no restriction on whether those earnings may be remitted to the UK.

Inheritance Tax Reforms

The inheritance tax (IHT) system will shift from a domicile-based to a residence-based system. Potentially as early as 6 April 2025, non-doms' foreign assets will be subject to UK IHT if they have been UK residents for ten years or more. Anyone who has been resident in the UK for 10 years or more and then leaves the UK will remain subject to UK IHT on their worldwide assets for a further 10 years.

The new rules are expected to subject non-UK situs assets held in a trust to inheritance tax (IHT) if the settlor meets the 10-year residence criteria or falls within the 10-year tail provision. This applies to assets both at the time they were settled and when ten-year anniversary charges or exit charges arise.

Implications for New Residents Moving to the UK in 2025

For individuals planning to move to the UK in 2025, the changes bring opportunities and challenges:

Planning Opportunities

• Tax-Free Foreign Income and Gains: New residents can bring foreign income and gains into the UK tax-free for four years.
• Overseas Workdays Relief: Planning employment contracts to maximise OWR can lead to significant tax savings.

Long-Term Considerations

• Inheritance Tax: The shift to a residence-based inheritance tax system necessitates careful estate planning.
• Trusts and Offshore Assets: The removal of protections for offshore trusts requires revaluation and possible restructuring of existing structures.

When Will We Know More?

Details on the reforms and their timetable should be announced by the Government in the Autumn Budget. The date of the Budget should be announced by the end of July and is anticipated to be sometime in October.

For now, the tax changes are scheduled to take effect from 6 April 2025, but there are three possibilities:

1. All (or most) changes will take effect on 6 April 2025.
2. Some changes tax effect from 6 April 2025, with other aspects such as IHT reforms, possibly delayed.
3. All changes will be delayed, possibly to 6 April 2026.

What Next?

The proposed abolition of the non-dom regime signifies a major shift in the UK's approach to taxing individuals moving to the UK. While these reforms present new opportunities, they also pose challenges requiring careful planning and professional advice.

Prospective non-doms must understand and prepare for these changes to make the most of the new regime and ensure compliance with UK tax laws. With the right strategies and guidance, navigating this transition will be smoother and could have beneficial outcomes.

Please get in touch with an expert Sopher + Co adviser to discuss your own or your client's options.

Email: enquiries@sopherco.com

Written by James McLaughlin, Director