The death of the non-dom regime

The UK has always been a preferred onshore jurisdiction for wealthy foreign individuals.

In the autumn Budget, Labour stood by its manifesto to scrap the non-dom regime and align the tax obligations of non-domiciled residents with those of other UK residents. The old regime will be abolished from 6 April 2025 and replaced with a new four-year residence scheme. 

This is the latest in a long line of changes to the non-dom regime, with successive governments making changes that have impacted the scope and value of the scheme. 

It started with the remittance charge in 2008, Annual Tax on Enveloped Dwellings (ATED) rules in 2012, and a revised non-dom regime in 2017. This latest move will provide ‘100% relief on foreign income and gains (FIG) for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival  .’ (You can read the government’s full guidance here.)

The new residence regime (the New Regime) 

From 6 April 2025, the New Regime for personal FIG will be available to individuals for the first four tax years post-arrival to the UK (Exempt Period), providing they have been tax resident outside the UK for a period of more than 10 years (New Resident). 

Under the New Regime, individuals will only pay tax on UK source income and capital gains and will be able to remit FIG to the UK free from tax, on the basis that a claim is made for the Exempt Period. 

It should be noted that the Exempt Period includes any tax year where an individual is treated as UK resident under the Statutory Residence Test. A split year will still count as a full year of UK residence. As a result, the timing of arrival to the UK will be key. 

Existing UK residents, who have been resident in the UK for less than four years on 6 April 2025 can still benefit from the New Regime until the end of their fourth year of residence. This should create tax planning opportunities. 

Furthermore, former remittance basis users who return to the UK after a period of 10 consecutive years of non-UK residence, can access the New Regime for any FIG that arise in the following four-year period. Any FIG previously sheltered from UK tax via a claim for the remittance basis will remain taxable upon remittance, although such FIG may benefit from the temporary repatriation facility to reduce the tax payable (details below). 

As with the current remittance rules, not all FIG will qualify for relief during the Exempt Period. 

Finally, from 6 April 2025, Inheritance Tax (IHT) will be taxed solely by reference to UK tax residence, so that for the first 10 years of UK residence, only UK assets will be subject to IHT. Thereafter, an individual will become a long-term resident, and their worldwide assets will be within the scope of IHT. 

IHT will continue to apply for a period of years. The length will be determined by how long the individual has been UK resident. It will start with three years for individuals who have been UK resident for 10 to 13 of the previous 20 UK tax years, increasing to a maximum of 10 years for those who have been a UK resident for 20 tax years or more. 

Rules relating to existing non-doms 

All other residents who are not eligible for the New Regime, and relevant non-resident trusts, will be taxed on all new FIG that arises from 6 April 2025, subject to several transitional measures that will be introduced to mitigate the impact of the new regime. These include: 

• Re-basing of capital assets to 5 April 2017 levels for disposals that take place after 6 April 2025 for current non-doms. This benefit is narrow, as it will only apply to individuals who have claimed the remittance basis since 5 April 2017, and have not been UK domiciled or UK deemed domiciled before 5 April 2025.*

• Temporary Repatriation Facility (TRF) will allow non-doms to remit FIG that arose before 6 April 2025 to the UK at a rate of 12% in the 2025-26 and 2026-27 tax years, and a rate of 15% in the 2027-2028 tax year. This will only relate to personal FIG of remittance users, and the relevant FIG must be ’designated’. 

• Unremitted earnings which arose prior to 6 April 2025 and were subject to overseas workday relief (OWR) will be eligible for designation under TRF, but TRF will not apply to FIG arising during an individual’s period of temporary non-residence. 

• TRF will also be available to settlors or individuals who receive benefit from an offshore trust, during the 2025/6, 2026/7 and 2027/8 tax years. 

• Business Investment Relief (BIR) will continue to be available for investments up to 5 April 2028. FIG invested under BIR will be eligible for TRF, although the rules have yet to be published. 

Treatment of trusts 

A beneficiary who qualifies for tax treatment under the New Regime, and makes the claim, will be able to claim the full tax relief on the FIG distributed or matched to them in the structure. 

If the New Regime is not available, income distributions will be taxed in the normal way, and capital payments and benefits will be matched to income and gains in the usual way. 

Settlor-interested trusts 

FIG arising in settlor-interested trust, will be assessed on the settlor as they arise, unless the settlor qualifies for tax relief under the New Regime. 

Tax on income attributed to the settlor, could be paid from the trust, without this itself being treated as a benefit and triggering a further tax charge. 

Furthermore, from 6 April 2025 the excluded property status of non-UK settled assets will only be excluded if, at the time of a charge, the settlor is not a long-term resident. 

It should be noted that if the settlor died prior to 6 April 2025, the current IHT rules will continue to apply, and non-UK assets will continue to be excluded property provided the settlor was non-domiciled at the time the trust was established. However, if the settlor dies after 5 April 2025, the IHT status of the trust will depend on the long-term residence status of the settlor upon death. 

Finally, assets of certain interest in possession trusts that are treated as being within the life tenant’s estate for IHT purposes, will only be excluded property if neither the settlor nor the life tenant are a long-term resident. 

Interaction with the gifts with reservation (GWR) rules 

Currently, non-UK assets settled in a settlor-interested trust by a non-UK domiciled settlor, are not subject to the GWR rules, regardless of the donor’s domicile position on death. 

Under the new laws, non-UK assets comprised in a settlement which were excluded property before 30 October 2024, will continue to fall outside the scope of the GWR rules. 

So, while the trustees may be liable to IHT if the settlor is a long-term resident, GWR will not apply. However, if additions or new settlements are established on or after 30 October 2024 then the non-UK property will be subject to the GRW rules, so if the settlor is a long-term resident, the non-UK assets will form part of his estate for IHT purposes. 

Trustees UK tax liabilities 

Trustees should be aware that from 6 April 2025, the IHT status of a trust will depend on whether the settlor is a long-term resident. A trust could, therefore, move in and out of the scope of IHT, depending on the settlor’s movement. 

The maximum rate of IHT payable by trustees on a 10-year anniversary is currently 6%. The 10-year anniversary charge and the rate payable when capital is distributed between anniversary dates (an ‘exit’) may vary depending on whether there are periods in which the trust assets are outside the scope of UK IHT. 

Furthermore, if the settlor ceases to be a long-term resident the trust may be subject to an ‘exit charge’ on the value of the non-UK assets. 

How we can help 

As the changes are fast approaching, we will be happy to assist with reviewing your existing structures and advise on potential options.

* Similar to the rebasing opportunity, which was available to non-doms who became deemed domiciled on 6 April 2017.