Should I stay in the UK under new non-dom rules?

Private Wealth Partner, Julie Howard, provides expert commentary in the Financial Times looking at the following scenario...

Q: I moved to the UK from South Africa just before the previous Conservative government’s changes to non-dom tax rules were announced. I have my own business and some offshore trusts and have concerns about when these will begin to be taxed under UK law. I wonder whether I should put down long-term roots here (my children are approaching secondary school age), and how my tax position will be affected from April 6, following the Budget announcements and non-dom changes.

A: Julie Howard, partner at law firm Boodle Hatfield, says the old non-dom regime used to allow UK residents domiciled overseas not to pay UK tax on foreign income or gains, provided they don’t bring it into the country.

After April 6, the new regime will allow people not to pay UK tax on foreign income or gains — even if they didn’t bring it into the country during the first four years of residency. Thereafter, however, UK income tax and capital gains tax will apply to worldwide income and gains.

Since you say you arrived here shortly before last March you may be eligible to claim this new regime for the remainder of your first four years in the UK. You can receive trust distributions and dividends from overseas companies, for example, during this period and bring them into the UK tax-free. This marks a significant change from the existing regime, providing substantial scope to bring foreign profits into the UK to fund your living expenses or acquisition of UK assets.

Once outside the four-year regime, in addition to being taxed on worldwide personal income and gains, you would also be liable to income and gains realised by trusts you created and retain an interest in, and certain overseas companies in which you hold particular interests.

Your trusts and personal assets should therefore be reviewed before April 6 2025to determine any pre-emptive actions, such as reorganising structures ahead of you ceasing to be eligible for the four-year regime. There is also scope for designating offshore income or gains realised between becoming UK tax resident and April 6 2025 under the Temporary Repatriation Facility at a favourable tax rate, which can then be remitted to the UK without further tax.

You should also review the overseas assets you hold personally — once outside the four-year grace period, the income and gains generated by these will be taxable. Gains realised from investments in non-reporting status funds, for example, are taxed at higher income tax rates, whereas gains from investments in reporting status funds will be taxed at lower capital gains tax rates.

Under the new regime, after 10 years of UK residency, your worldwide assets will also come within the scope of UK inheritance tax, with a “tail” of three to 10 years applying to those leaving the UK after this time, depending on their length of UK residence. If you are not staying in the UK long term, you should consider whether to move before you have been resident for 10 years, to avoid the sting in the inheritance tax tail.

This article was first published in the Financial Times (paywall) in January 2024.