New UK Non-Domicile Tax Programme 2025

On 29 of July 2024, the UK Government released its first policy paper detailing significant changes to the non-domiciled (non-dom) tax regime, addressing the country’s £20 billion financial deficit. The proposed reforms aim to overhaul how non-doms are taxed, with the goal of increasing tax revenues. Non-doms, individuals residing in the UK without permanent or indefinite status, currently enjoy tax benefits on their foreign income and gains, which will largely change under the new rules effective from April 6, 2025.

The current non-dom tax structure allows these individuals to pay UK taxes only on income and gains generated or brought into the UK, exempting foreign income and assets unless they are situated in the UK. After 15 years of UK residency, non-doms become "deemed dom" and are taxed on their worldwide income, gains, and assets. Before this point, they can use "protected settlement" trusts to shield foreign assets from UK taxes. However, this advantageous setup will be abolished, and the new regime will directly attribute worldwide trust income and gains to UK residents after four years.

The new policy introduces several changes, including the removal of the remittance basis of taxation and the abolition of protected settlement rules for trusts. The changes will also allow non-doms to revalue their assets to mitigate capital gains tax. A notable adjustment is the Temporary Repatriation Facility (TRF), enabling non-doms to remit foreign income and gains to the UK at a reduced tax rate for a limited period. However, specific rates and duration for this facility are yet to be decided.

Under the proposed reforms, inheritance tax (IHT) will also shift to a residence-based system. For the first ten years of UK residence, only UK assets will be subject to IHT, expanding to worldwide assets after ten years. Trusts created before April 2025 will no longer be protected from IHT on non-UK assets, aligning with the broader goal of ensuring equitable tax treatment for all long-term UK residents. The government plans to refine anti-avoidance rules to ensure the new system's effectiveness and fairness.

The government has set a firm date for the implementation of the new regime, leaving non-doms only eight months to adapt. Draft legislation is expected around the UK’s Budget Day on October 30, 2024, with more detailed provisions anticipated then. In light of these impending changes, non-doms may consider various tax planning strategies or even contemplate leaving the UK to avoid the new tax burdens. Overall, the upcoming reforms represent a significant shift in the UK's tax landscape for non-domiciled individuals.

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