Non-domiciled (non-dom) status has long been a political hot potato, with the debate surrounding the divisive tax regime rising to the top of the political agenda over recent years.
In his Spring Budget of March 2024, then-Chancellor Jeremy Hunt announced an overhaul to the non-dom regime currently operating in the United Kingdom in what is perhaps the biggest change planned for the UK personal tax system in modern times.
However, following comments made by Rachel Reeves prior to the landslide Labour majority in the UK general election, it is clear that the new Labour government intend to curtail the tax relief currently enjoyed by non-doms and take the changes proposed by the Conservatives considerably further.
At Present
Under the current system, which will remain in force until April 2025, UK residents who are not domiciled or deemed domiciled in the UK have tax-free status in relation to their offshore income and gains until such funds are remitted to the UK (known as the “remittance basis”).
Where a non-dom is resident in the UK for 15 out of the last 20 tax years, they become deemed domiciled in the UK and are then subject to UK tax on their worldwide assets.
The Proposal
The new system is to be based on the residence of the individual. If they have not been resident in the UK for at least the preceding 10 years, their first four years of residence will benefit from the Foreign Income and Gains (FIG) regime in which the individual can elect not to pay tax on their non-UK source income and gains, and therefore remit such funds to the UK without triggering a tax charge. After four years, the individual will be taxed on their worldwide gains, without exception.
The proposals also significantly alter the Inheritance Tax (IHT) treatment of non-doms. Under the current regime, non-doms only pay IHT if they become deemed domiciled in the UK, or, in the case of a non-dom spouse or civil partner of a UK domiciled person, have elected to be treated as UK domiciled for IHT. The Sunak government suggested that under the new rules, non-dom foreign assets would be subject to UK IHT where the non-dom had been resident in the UK for over 10 years.
Under Labour
To help individuals acclimatise to the new regime, the Sunak government intended to introduce a number of measures to soften the withdrawal of the remittance basis. Those who do not qualify for the FIG regime but previously benefitted under the remittance basis would pay income tax on only 50% of their foreign income in the first year of the FIG regime. On the contrary, Labour have said that they will scrap this transitional measure, bringing in a supposed £600 million in additional revenue for the treasury.
There is also a proposed repatriation facility to enable those previously taxed on a remittance basis to remit foreign income and gains to the UK at a new 12% rate of rate in the tax years 2025/26 and 2026/27. Labour has not given any detail on their plans in this regard, but it has been suggested that they will support this measure to encourage increased investment in the UK from non-doms.
In terms of the suggested changes to the IHT regime by the former government, a consultation was still ongoing at the time of the general election and so there is a degree of uncertainty surrounding Labour’s approach to IHT.
However, the party have been clear on their view of offshore trusts set up by non-doms. At present, if a non-dom places non-UK assets in a trust before they become deemed domiciled, the assets will be permanently outside the scope of IHT. The proposed changes from the former government intended to keep this opportunity open until 6 April 2025 but Labour has identified a gap of £430 million in IHT per year owing to the existence of these trusts. Labour intends to capture all foreign assets held in all forms of trust within the UK IHT regime, regardless of where or how they are settled.
The path to achieving this is unclear and it remains to be seen whether the party seek to unravel such trusts already in existence.