Non-dom tax – what should you do now?

The Labour Party published its manifesto on 13 June, confirming that it will ‘abolish non-dom status once and for all’ and ‘end the use of offshore trusts to avoid inheritance tax’.

The manifesto policy follows Labour’s announcements in April, made in response to the Government’s own announcements in the Budget. The Government’s own policy raises a lot of uncertainties, and the Labour Party’s all the more so. However, Labour indicated in April that it broadly supports the Government’s proposals. Their proposed policy goes rather further in respect of non-UK trusts, and certain transitional provisions, but the key elements of the policy seem to be similar (and many in fact see it as really being Labour’s policy in the first place).

Any changes will need to be legislated, but given that the Government has announced that they would implement the reforms from 6 April 2025, it seems likely that Labour will also aim for this date.

So, what do we know?

Although much is uncertain, it is clear that whoever is in power after 4 July, the 15-year remittance basis of taxation (see Box 1) will shortly be scrapped, probably from 6 April 2025. In its place it seems highly likely that there will be a new regime applying to foreign source income and gains (‘FIG’). The Government has announced a four year FIG regime (see Box 2), and from what Labour has said it seems it will offer something very similar.

As a result, many individuals who currently use the remittance basis will find their worldwide income and gains within the scope of UK income tax/capital gains tax (CGT), if they are still UK resident.

It is also clear that the majority of trusts which have both UK and non-UK connections will be affected, and there may be unexpected tax consequences arising to beneficiaries, trustees and settlors.

In addition to this, there have been announcements concerning inheritance tax, though these are even less clear than the changes to the taxation of income tax and gains.

What you can do now

There is no need to wait until the rules are set in stone (by which time it may be too late to plan in order to address them). Many individuals and trustees will be affected by the changes, and we would recommend they take advice as soon as possible.

Non-doms who have been resident for more than 4 years (and potentially less, given that we don’t know for sure that Labour will offer their equivalent regime for 4 years)

As noted above, these individuals will lose the right to the remittance basis, and all foreign source income and gains will be within scope of UK taxes.

Some (particularly US citizens, though there will be others) will have relied on the remittance basis to prevent double taxation. Those individuals will need to take advice on the relevant tax treaties and similar provisions to ensure they are not taxed in two (or more) jurisdictions on the same income / gains. In theory treaties should prevent double taxation, but in practice they sometimes don’t, and restructuring may be required.

These individuals will also need to look at what their tax bill may actually be, and plan how to pay it if necessary (you never know, with treaty and other reliefs it might be less than you expect!)

Others may wish to consider limiting their time in the UK, so they become non-UK resident. That way, foreign income and gains would remain outside the scope of UK income tax and CGT. They do not necessarily have to leave, but will need to take advice on the Statutory Residence Test to see how many days they can spend, and what connections they can have, without being UK tax resident.

An alternative for some will be to restructure investments. Some effectively defer tax, and when this finally falls due the individual may be better placed to pay it, or planning to live in a jurisdiction with lower tax than the UK (there are quite a few!)

Finally, these non-doms may want to take advice on whether they should elect for the remittance basis for the 2024/5 tax year. It is still available and may be beneficial. The election may also help in respect of future CGT – the Government’s proposals included an offer in respect of rebasing for CGT purposes, but it seems this may require an election for the remittance basis to have been made at some point for rebasing to be available.

Non-residents who spend a lot of time in the UK

Some individuals are quite relaxed about becoming inadvertently UK resident for the odd tax year. In the past this may not have made a great deal of difference to them, particularly if they have structured their affairs in a certain way.

From April next year, though, this is set to change. Under the Government’s proposals (and Labour has indicated nothing in its own policy to the contrary) becoming UK tax resident for one tax year will start the 4 year clock ticking, and it will keep ticking even if the person is non-UK resident for the next few years (unless they can be non-resident for 10).

It will therefore be important to avoid accidental UK residence. Those who are non-resident, but need or want to spend time in the UK will need to take advice on the statutory residence test, to ensure they either remain non-UK resident, or become UK resident in a planned way, knowing what the consequences will be in advance.

Returning Brits

Most people from the UK, who have been away for more than 10 years, do not have the option of the remittance basis at present. However, it follows from the Government announcements (and Labour has said nothing to the contrary) that they will have the option of the FIG regime, and may want to take advice on how to maximise its benefits.

Trusts

Given the variables involved in trusts, it is difficult to set out general guidance. However, in specific cases there will be specific advice.

Trustees may need, for example, to look at restructuring the trust, making distributions, restructuring investments or terminating the trust, and these things may need to be done before the rules change.

If the settlor is UK resident, but considering non-UK residence, they may wish to bring this forward (again, perhaps to before the new rules are introduced). In many cases it will improve their own and the trust’s UK tax position. Breaking UK residence does not, of course, mean spending no time in the UK, it may just involve spending less time, or reducing links.

So despite all the uncertainty about the new rules, non-doms resident in the UK, those spending time in the UK, Brits returning, and anyone involved with a trust with both UK and non-UK connections, are all likely to benefit from advice prior to the changes. Forewarned is forearmed.

Box 1: The Remittance Basis An option for non-doms (which approximately means individuals from outside the UK) No income tax/capital gains tax (CGT) on UK source income and gains, unless ‘remitted’ (brought to the UK or used in connection with UK assets). Available for up to 15 years (with various charges associated with it).

Box 2: The FIG Regime* An option for individuals who have been non-UK resident for at least 10 tax years. No income tax / CGT on foreign income / gains, even if brought to the UK Available for 4 years after first become UK resident.

*The above summarise the Government’s key proposals. Labour has indicated it is broadly in agreement with the Government policy and has not announced any disagreement with the specific proposals above. 

If you have any questions regarding this subject please contact Lara Mardell and David Goepel of the Private Client team, or Sean Bannister and Hetal Sanghvi of the Tax team.

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