The impact of the UK’s changing non-dom landscape on wealthy Africans

The UK’s non-dom regime has attracted HNW individuals from Africa in particular, but with reforms announced by the government earlier this year, greater clarity is needed to mitigate concerns.

A key feature of the UK’s favourable non-dom regime has been the remittance basis, which allows offshore income and gains to be outside the scope of UK tax. In recent years this has been a particularly attractive draw for African high net worth individuals (HNWIs).

Non-UK domiciled individuals (non-doms) who set up and funded offshore trusts have generally not been liable to UK tax on income and gains generated within the trusts unless they received distributions and remitted these to the UK.

Such trusts have typically been outside the scope of UK inheritance tax depending on the assets held. Trusts are a widely used asset holding vehicle for succession planning and asset protection purposes. For African clients, trusts have offered a useful tool for diversifying the location of their wealth.

The taxation of non-doms and offshore trusts will now be subject to landmark sweeping reforms. From April 6, 2025, the remittance basis will be replaced with a new residence-based regime and the concept of domicile will be replaced for inheritance tax purposes. A new residence-based regime will instead apply with inheritance tax on worldwide assets after 10 years of UK residence (rather than the current 15 years) with a 10-year tail for individuals who leave the UK.

A modernisation of the remittance basis with the aim of creating investment opportunities in the UK was long overdue. However, the chancellor’s Budget on October 30 needs to provide greater clarity.

Significant change

The Labour government has committed to replacing the remittance basis with a new four-year regime available to individuals who move to the UK and who have not been UK tax resident in the previous 10 years. There will be no UK tax on foreign income and gains realised during that four-year period, even if brought into the UK. This marks a significant change from the remittance basis regime, which discouraged bringing offshore income and gains to the UK.

For African individuals, it will be possible to sell assets such as businesses in Africa after their arrival, and to bring the sale proceeds into the UK at no charge during those first four years of UK residence. While this is an attractive change, it would have been welcome to extend the new regime for longer than four years.

There will also be transitional reliefs available for foreign income and gains realised before April 6, 2025, including a Temporary Repatriation Facility for individuals who have previously claimed the remittance basis. This will offer a reduced tax rate applicable to such income and gains brought into the UK from next April. The previous government announced in March this would comprise a 12 per cent rate for two years, but the new government is reviewing both the rate and duration.

There will also be the opportunity for remittance basis users to rebase assets for capital gains tax purposes, although we do not yet know what the rebasing date will be. While the previous government had indicated April 5, 2019, it is to be hoped that a date closer to the introduction of the changes will be selected.

Where African HNWIs would like greater clarity is on the complex taxation of offshore trusts which can result in UK resident beneficiaries being taxed on distributions they receive from the income and gains generated within trusts. It is hoped that the government will simplify these rules. The Temporary Repatriation Facility may also apply to income and gains within overseas structures, with details to be announced in the Budget. This would be welcome as it would enable UK resident individuals who are outside the four-year regime from next April to extract funds from offshore trusts at a favourable tax rate to spend and invest in the UK.

However, many African clients are concerned that existing offshore trusts they set up, in some cases many years ago, may now come within the scope of UK inheritance tax, once the settlor has been a UK resident for 10 years. The government has stated that it will consider how the inheritance tax changes will be applied to existing trusts and has suggested that there will be transitional arrangements for settlors of such trusts.

Options to consider

Individuals moving to the UK from Africa from next April who are hoping to take advantage of the four-year regime will need to check whether they have been tax resident in the UK in any of the previous 10 years. It is common for individuals contemplating relocating to the UK to spend time there in advance of a permanent move, so they should take care not to exceed day counts under the UK’s Statutory Residence Test before they plan to commence UK residence.

For people already living in the UK, it is important to conduct a review of asset holding structures and investments outside the UK and take professional advice. Options to consider could include switching from investing in “non-reporting” status funds (where gains are taxed at the higher income tax rates) to “reporting” funds (where gains are liable to the lower capital gains tax rates) and the use of single premium bond wrappers which offer tax-free annual 5 per cent withdrawals.

For asset holding structures, thought could be given to extracting funds (e.g. by dividend) before April 6, 2025 to take advantage of the favourable tax rate under the Temporary Repatriation Facility and remit these funds to the UK after next April.

With the government holding further engagement sessions with industry professionals, it is hoped that the details announced in the Budget will strike the right balance between raising tax revenue and encouraging investment in the UK. Ultimately, it continues to be an attractive jurisdiction for Africans to relocate to with many having existing family links to the UK, as well as being enticed by the education system and prime London real estate.

This article was first published in August 2024 in Professional Wealth Management.