Autumn Budget 2024: Non-Domicile Taxation

Long-awaited details of the proposed changes to the “non-dom” regime were finally revealed as part of the Autumn Budget announced by Rachel Reeves on 30 October 2024.

Much was as expected, but in welcome changes the government has extended the temporary repatriation facility in both duration and scope, and there is to be some transitional protection for excluded property trusts in place immediately before 30 October 2024.

We set out below the main features of the new regime.

Key points at a glance

• From 6 April 2025, the current “non-dom” regime will be abolished and will be replaced with a new residence-based regime. There will be a favourable four-year regime for foreign income and gains, and individuals will become subject to inheritance tax on their worldwide estate once they have been UK resident in 10 of the previous 20 years (a “long-term resident”).
• The remittance basis will continue to apply for pre-6 April 2025 income and gains, but previous remittance basis taxpayers will be able to remit previously unremitted income and gains for a three-year period at a reduced rate of tax under the Temporary Repatriation Facility. This facility has been extended in scope from what was previously announced and will apply to benefits received from trusts before 6 April 2025 as well as certain benefits received during the three-year period.
• Non-domiciled individuals who claimed the remittance basis in any of the 2017/18 to 2024/25 tax years will generally be able to “rebase” their foreign assets to their market value at 5 April 2017 for disposals made after 5 April 2025.
• Long-term residents leaving the UK will remain subject to inheritance tax on their worldwide estate for a period of between three and 10 years, depending on how long they were UK resident.
• The inheritance tax treatment of assets held in trust will depend primarily on the long-term resident status of the settlor, so if the settlor is or becomes long-term resident (or was at the date of death), all assets held within the trust will be within the scope of inheritance tax, irrespective of when they were settled. There is limited relief for non-UK assets held in an excluded property trust at 30 October 2024.

The new FIG regime

• As previously announced, from 6 April 2025 domicile will be abandoned as a connecting factor for UK tax purposes and the remittance basis will be abolished and replaced with a new favourable regime for an individual’s first four years of UK residence.
• New arrivers who have not been UK resident in any of the previous 10 tax years will be exempt from UK tax on their foreign income and foreign chargeable gains (known as “FIG”) for their first four tax years of UK residence. After the four-year period, FIG will be taxed as they arise, even if kept abroad.
• Taxpayers must claim the FIG relief in their tax returns and quantify and identify the source of the income and gains for which relief is being claimed. Relief will be given on a source-by-source basis, and FIG which is not quantified and identified will remain taxable at the usual rates.
• As when claiming the remittance basis under the current rules, claiming the FIG relief will mean losing annual income and capital gains tax allowances and the ability to use foreign income and capital losses in the year of the claim.
• Existing UK residents who have been resident for fewer than four tax years will be able to claim the relief until the end of their fourth year of tax residence.
• Those who have been UK resident for four years already and do not qualify for the new regime will be taxed on their worldwide income and gains from 6 April 2025. Individuals who have claimed the remittance basis previously will be able to benefit from the Temporary Repatriation Facility (see below) in respect of unremitted FIG from earlier years.

Application to trusts

• Beneficiaries of non-UK trusts who qualify for the regime will generally speaking be able to claim FIG relief in relation to trust distributions that they receive.
• The current income tax and capital gains tax protections for non-UK resident trusts will be removed. FIG arising in a settlor-interested trust with a UK resident settlor will be taxed on the settlor, unless the settlor claims FIG relief.
• Benefits from non-UK trusts that would have previously qualified for the remittance basis will generally qualify for FIG relief. But benefits for which the FIG relief is claimed will not be “matched” with FIG in the structure and so will not reduce the income or capital gains pools of that structure.

Overseas workday relief

• Overseas workday relief, which allows certain UK resident non-UK domiciled employees to be taxed on overseas earnings on the remittance basis, will continue to be available but the removal of the remittance basis means it will no longer be necessary to keep part of their employment income offshore. The relief will be extended to four years to align with the new four-year FIG regime, but will become subject to a new annual limit of the lower of £300,000 or 30% of the qualifying employment income.

The Temporary Repatriation Facility

• The remittance basis will continue to apply for pre-6 April 2025 income and gains. However, as previously announced, transitional provisions will be available for individuals who have previously paid tax on the remittance basis in at least one year in the form of the Temporary Repatriation Facility (“TRF”). The TRF will allow individuals who have previously claimed the remittance basis to remit their pre-6 April 2025 FIG and pay a special reduced tax rate for a limited period, being 12% in 2025/26 and 2026/27 and 15% in 2027/28.
• In a welcome change, the Chancellor extended the TRF to three years (from the two years announced previously), and confirmed that income and gains attributed to the recipients of trust distributions before 6 April 2025 will qualify for the TRF. Furthermore, where an individual who qualifies for the TRF receives a benefit from a non-UK trust during the TRF period, this will also qualify for the relief if “matched” with pre-6 April 2025 income or gains.
• For funds to qualify for the TRF, a taxpayer must “designate” the funds on their tax return for the relevant year. The TRF charge will be payable on the designation, but once a designation has been made, there will be no further tax to pay, regardless of the timing of remittance.
• Helpfully, the government have also confirmed that:

1. Individuals who cannot identify the content of a mixed fund can still use the TRF without having to identify each source of FIG contained within the fund. Designated amounts will be available for remittance in priority to all other income and gains held in the fund.
2. Individuals can choose how much to designate and need not designate the total of their unremitted FIG, and so can make partial designations.
3. Designations can also be made in respect of non-liquid assets that represent previously unremitted income and gains, so that all or part of the proceeds will benefit from the TRF if remitted at a later date.

Rebasing to 5 April 2017

• Individuals who have claimed the remittance basis in any of the 2017/18 to 2024/25 tax years and were not UK domiciled or deemed domiciled before 6 April 2025 will be able to “rebase” their foreign assets to their market value at 5 April 2017 for disposals made after 5 April 2025. To qualify for rebasing, they must have held the asset on 5 April 2017 and the asset must have been situated outside the UK from 6 March 2024 to 5 April 2025 (subject to certain exceptions).

Inheritance tax – the long-term residence test

• From 6 April 2025, domicile will cease to be a connecting factor for inheritance tax purposes. Instead, individuals will become subject to UK inheritance tax on their worldwide estate once UK resident for 10 of the previous 20 tax years, a so-called “long-term resident”. Special rules apply to individuals aged 20 or younger.
• A long-term resident who ceases to be UK-resident will remain within the worldwide scope of inheritance tax for between three and 10 tax years, depending on how long they were UK resident. An individual leaving after 20 consecutive tax years of UK residence will remain within the worldwide scope of inheritance for 10 years. 10 consecutive tax years of non-UK residence will “reset the clock” for long-term residence.
• Where a non-domiciled or deemed domiciled individual ceases UK residence before the new rules are introduced on 6 April 2025, their exposure to inheritance tax will continue to be based on the existing rules, i.e. they will only be subject to inheritance tax on their worldwide estate if they have been UK resident for 15 of the previous 20 tax years, and in at least one of the last four tax years (including the tax year in question). Therefore individuals who are neither domiciled nor deemed domiciled in the UK who cease UK residence before the new rules are introduced will not be subject to worldwide inheritance tax after 6 April 2025, even if they were previously UK resident for more than 10 years.
• Lifetime transfers of non-UK property by an individual who is not a long-term resident will generally remain outside the scope of inheritance tax, irrespective of whether the transferor is a long-term resident at the date of death. However, the gift with reservation of benefit rules will generally depend on the donor’s long-term residence at death (or when the reservation ceases) and, where the transfer is into trust, the rules for trusts (see below) need to be considered.
• Currently, a non-UK domiciled spouse or civil partner of a UK-domiciled individual can elect to be treated as deemed UK-domiciled for IHT purposes, to take advantage of the full spouse exemption. From 6 April 2025, there will be similar rules enabling a spouse or civil partner to elect to be treated as a long-term resident to obtain the benefit of the spouse exemption on a transfer of assets from a long-term resident spouse. The election will have effect until 10 consecutive tax years of non-residence have elapsed.

Application to trusts

• Under the current rules, the inheritance tax treatment of assets held in trust depends upon the domicile and deemed domicile status of the settlor at the date when assets became comprised in the trust; a subsequent change in the settlor’s domicile status does not generally affect the position. From 6 April 2025, the inheritance tax treatment of non-UK assets held in trust will follow the status of the settlor, meaning that if a settlor is or becomes long-term resident, all assets held within the trust will be within the scope of inheritance tax, irrespective of the settlor’s status when the assets were settled. Therefore, if a settlor becomes or ceases to be a long-term resident, the “excluded property” status of assets held in the trust will also change.
• Where property held in trust becomes excluded property as a result of a change in status of the settlor, an exit charge will be imposed. This includes where assets held in an existing trust become excluded property on the introduction of the new rules on 6 April 2025 as a result of the settlor not being a long-term resident.
• 10-yearly and exit charges will reflect the number of years that the trust assets were excluded property, and so charges should be lower in the early years of the new rules.
• Where a beneficiary has a qualifying interest in possession in trust assets, the assets will generally fall within the worldwide scope of IHT if either the settlor or the beneficiary is long-term resident.
• There are welcome transitional rules for non-UK situated assets held in “excluded property” trusts immediately before 30 October 2024. Such assets will not fall within the gift with reservation of benefit rules, and nor will a qualifying interest in possession in such a trust fall within the new rules. However, such property will be subject to the 10-yearly and exit charges discussed above, dependent upon the settlor’s long-term resident status at the relevant time.
• Where the settlor of a trust has died before 6 April 2025, whether non-UK assets of the trust are excluded property will be based on the old test, i.e. the settlor’s domicile and deemed domicile status at the time the property became comprised in the settlement.

This note is intended to provide a first point of reference for current developments in aspects of the law. It should not be relied on as a substitute for professional advice. If advice on a particular circumstance is required please contact your Boodle Hatfield lawyer or one of the lawyers listed as authors.