Non-doms in limbo – will there be a mass exodus?

Following the then-Conservative government's announcement in the March Budget that it would abolish the remittance basis of taxation, non-domiciled individuals living in the UK and their advisers have been grappling with the impact of these proposed changes.

The recently elected Labour government confirmed before the election that it was broadly in agreement with the proposals.

While the changes did not figure in the King’s Speech, more details of the proposed regime, including draft legislation and hopefully a consultation on inheritance tax, are anticipated in the Autumn Statement.

What is the remittance basis of taxation?

The remittance basis of taxation has been a feature of UK tax legislation for more than a century.

It has been available to non-UK domiciled individuals, who come to live in the UK and who, broadly, regard their permanent home as remaining outside the UK.

When claimed, foreign income and gains realised by those individuals are not liable to UK tax provided these are not remitted to, or enjoyed in, the UK.

There are around 37,000 individuals who claim the remittance basis in the UK and they paid about £6bn in income tax, capital gains tax and national insurance contributions in 2020-21.

Contrary to reports in the media last year about the tax paid by the former prime minister’s wife, the remittance basis is not a tax loophole, but an integral part of tax legislation applicable to individuals who make the UK their temporary home.

The widely appreciated downside of the remittance basis is that it has deterred individuals from investing in the UK as they have been able to minimise their UK tax bills by retaining, outside the UK, the income and gains they have generated abroad.

While the new regime has the potential to generate increased investment in the UK, it will be important for our new government to strike the correct balance between encouraging individuals to move to the UK and ensuring the new system is attractive enough to entice them to stay.

If the government does not succeed in this balancing act, there are many other countries in Europe and elsewhere in the world that will welcome our non-doms with open arms, offering more favourable tax regimes to encourage them to move.

Dubai, Italy, Spain, Portugal, Switzerland and Monaco are among those with attractive tax rules to attract the wealthy.

The proposals

Under the proposed changes, individuals coming to live in the UK (and who have been non-resident for the previous 10 years) will benefit from no UK tax on their foreign income and gains (even if these are remitted to the UK), for the first four years of UK residence.

This is a significant change to the current remittance basis and will encourage individuals to bring offshore funds to the UK.

Unlike the current remittance basis regime, it would also be available to UK expats living abroad who decide to return to the UK having been outside the UK for at least 10 years.

After those four years expire, individuals will become liable to UK tax on their worldwide income and gains.

This will include liability in relation to income and gains realised by certain offshore trusts and companies that have been set up by non-doms.

The inheritance tax regime is also going to change with the concept of domicile being abolished and liability to IHT on worldwide assets instead applying after 10 years of UK residence, with a 10-year tail for those who subsequently leave the UK after that period.

What are the concerns from nom-doms?

Many individuals who move to the UK from abroad set up asset holding vehicles such as offshore companies and trusts.

These structures offer valuable succession planning and asset protection advantages, which are often the key drivers for establishing these vehicles.

Under current UK tax rules, offshore income and gains generated within these structures have typically not been taxable unless remitted to the UK.

Moreover, offshore trusts holding non-UK assets are generally outside the scope of UK IHT.

From April 6 2025, under the current proposals, individuals who have been living in the UK for more than four years, and who have previously set up offshore trusts and companies on the basis of existing UK tax rules, will find themselves with a new ongoing tax bill for the income and gains generated by these asset holding vehicles.

The new chancellor, Rachel Reeves, further stated before the election that Labour would bring existing offshore trusts within the scope of IHT, citing an increase in tax revenues as a result.

However, such a proposal will have the effect of bringing, within the scope of IHT at 40 per cent, non-UK assets held within many offshore trusts.

There could also be ongoing periodic charges of up to 6 per cent, which would result in double IHT exposure.

While UK resident non-doms may have accepted the income tax and capital gains tax charges on their offshore trusts, it is this sudden imposition of IHT (and fears of double charges to this tax) that is proving too much for many.

This is already prompting some to consider other more favourable jurisdictions to move to. An exodus of the wealthy, and resulting dwindled tax revenues, depends on how far the new government goes with these changes.

What would a more attractive regime look like?

It is widely considered that the proposed four-year regime is simply too short to encourage individuals to put down roots in the UK and stay here long term.

People may move to the UK on a purely temporary basis and then, after the four-year period expires, relocate to another more favourable jurisdiction for a longer period.

However, if the proposed regime was instead for a period of around six or seven years, individuals would be more likely to end up settling in the UK, where they would inevitably contribute further to the economy by spending, investing and paying UK taxes.

A longer regime than four years would also align the UK more closely with competitors such as Italy, Greece, and Israel, where exemption periods range from 10 to 15 years.

Labour has argued increased tax revenue would be generated from bringing existing offshore trusts within the scope of IHT.

However, at the time this did not factor in the risk of this prompting greater numbers to leave the UK, resulting in a loss of that anticipated revenue, with a knock-on effect on the other figures on which the proposed changes are based.

Indeed, the Institute for Fiscal Studies has pointed out that there are downsides to the proposals, with uncertainty around the extent of the tax revenue that will be generated by scrapping non-dom status.

This uncertainty arises as the government simply cannot predict exactly how non-doms currently living in the UK will react to such wide-ranging changes to their tax status. The proposals have the potential to backfire, resulting in non-doms exiting the UK and putting off others from moving here.

In practice, this is borne out by the increased enquiries we are seeing from non-dom clients who are now keen to leave the UK.

Preparing for the impact of the new regime

Amidst the ongoing uncertainty surrounding the scope of the new rules, individuals who have not already done so should consult with professional advisers to ascertain their options to enable them to take action as soon as the details of the new regime become clearer.

In particular, it is important to review existing offshore asset holding structures to determine how these are likely to be impacted by the proposed changes and to look at the UK residence status of settlors and beneficiaries of offshore trusts.

Investment portfolios should also be reviewed, and individuals who have been living in the UK will need to determine when they will come within the scope of IHT under the new residence-based regime.

If individuals instead decide to relocate, preparations need to start now as it takes time to determine which offshore jurisdiction to move to.

Potential transitional reliefs may offer some respite from the impact of the new rules for an initial period. In fact, Labour indicated before the election that they may extend these to encourage more investment in the UK, which would be a welcome move.

There are also benefits of the new four-year regime: the move away from the concept of domicile to residence will provide greater certainty and individuals will now be able to bring their income and gains generated abroad to the UK with no tax charge during the four-year period. This marks a significant shift.

However, while the four-year regime has the potential to encourage individuals to come to the UK, after that short period expires they may decide to relocate to jurisdictions with more attractive tax regimes.

With the IFS pointing out the uncertainty surrounding the anticipated tax revenues from the proposed regime, if the new government does not strike the right balance, the proposals could result in a mass exodus of non-doms and, conversely, a fall in tax revenues.

This article was first published in the FT adviser in July 2024.