The end of the ‘non-dom’ tax regime draws closer

In March 2024, plans were announced by the then-Conversative Government to abolish the current "non-dom" regime and move to a residence-based system from 6 April 2025.

We outlined the fundamentals of the proposals from March 2024 here.

On 30 July 2024, the new Labour Government published a policy paper which provided some clarifications and changes to the proposed reforms. Full details and draft legislation are set to follow at the Autumn Budget on 30 October, following further stakeholder engagement.

We have summarised the key changes announced in the policy paper below.

Income tax and capital gains tax

• As previously announced, from 6 April 2025 domicile will be abandoned as a connecting factor for UK tax purposes and the remittance basis will be abolished and replaced with a new favourable regime for an individual’s first four years of UK residence. However, the policy paper makes changes to some of the transitional provisions previously announced, some of which are more welcome than others.
• As had been anticipated, the Government has scrapped the proposal for remittance basis users (RBUs) to benefit from a 50% reduction in the income tax rate on foreign income in the first year of the new regime. Existing RBUs who have been UK resident for four or more years and do not qualify for the new regime will therefore become subject to tax on their worldwide income and gains at full rates from 6 April 2025.
• Existing RBUs will, however, still be able to benefit from the previously announced Temporary Repatriation Facility (TRF). This will allow individuals who have previously claimed the remittance basis to remit their pre-6 April 2025 foreign income and gains (FIG) and pay a reduced tax rate for a limited period. The policy paper states that “the rate and the length of time that the TRF will be available will be set to make use as attractive as possible”, which is a change from the previously announced special rate of 12% and a period of two years, but suggests it could be available for a longer period. The Government is also “exploring ways to expand the scope of the TRF, to include stockpiled income and gains within overseas structures”, which is a welcome change.
• In addition, RBUs will be able to “rebase” their non-UK capital assets. The previous Government had announced a rebasing date of 5 April 2019 but the policy paper states that Labour Government is considering the appropriate rebasing date and will set this out at Budget, so this is likely to change.
• The Government has also announced that a review will be conducted of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, which can tax the income of trust structures on either the settlor or beneficiaries, “to modernise the rules and ensure they are fit for purpose”. Although, it is not anticipated that this review will result in any changes before the start of the 2026/27 tax year, this is a new and welcome development.

Inheritance tax

• The Government confirms that it intends to replace the domiciled-based inheritance tax (IHT) system with a new residence-based system from 6 April 2025. The changes will no longer be subject to a formal policy consultation but instead HMRC will engage with stakeholders.
• The basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for the previous 10 years, with provision to keep a person in scope for 10 years after leaving the UK. The Government “will engage with stakeholders on the operation of the new test, so that any refinements can be considered fully”. There is no mention of the “additional connecting factors” for IHT purposes announced by the previous Government, which suggests the new rules will be based solely on residence.
• The Government has announced that it will “end the use Excluded Property Trusts to keep assets out of the scope of IHT” and that it intends to “change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here [in the UK]”. As expected, there will be no relief for existing excluded property trusts established before 6 April 2025, as had been announced by the previous Conservative Government. However, the paper notes that “The Government recognises that trusts will already have been established and structured to reflect the current rules, so is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.” This does therefore suggest that there will be some form of transitional arrangements for existing trusts, which would seem to be a softening of their stance before the general election.

There remains a lot of uncertainty about the precise changes and further details will need refinement before legislation is ready to be published following the Budget on 30 October. The direction of travel does however seem clear – to implement the above proposals including the 4-year FIG regime so that they take effect from 6 April 2025.

This note is intended to provide a first point of reference for current developments in aspects of the law. It should not be relied on as a substitute for professional advice. If you have any questions, please get in touch.