End of the 'non dom regime' in the UK

In his spring budget delivery, the Chancellor of the Exchequer announced the abolition of non-dom regime with effect from 6 April 2025. It was not the bombshell he hoped for as it had been clear that he wanted to beat Labour to it. By way of a transitory measure an alternative simpler regime will be introduced.

What are non-doms

A “UK non-dom” is a person resident in the UK who is considered to be domiciled (i.e. with their permanent home) elsewhere for tax purposes. To determine whether a person is a UK resident, the UK uses a day-counting principle for this purpose (referred to as the Statutory Residence Test). Nevertheless, UK residents without a UK domicile, may under the current law benefit from a preferential tax regime, the so-called “UK non-dom regime”. “UK non-doms” only pay UK tax on their UK income and gains ; they can postpone paying UK tax on their non-UK/foreign income and gains. Therefore, they can elect to claim the “remittance basis”, in which case UK income tax is due only in case that income is remitted to the UK. Of course, when a person moves out of the UK before remitting any of that income, this may lead to avoidance of taxation.

In addition, for an individual qualifying as a UK non-dom, UK Inheritance Tax (IHT) is due only on UK situs assets but not on non-UK assets. Those assets only become taxable in the UK once the individual becomes deemed domiciled for UK tax purposes.

The new tax regime (“FIG” regime)

A new tax regime will be introduced for foreign income and capital gains for individuals who have been non-UK tax resident for at least ten consecutive years, regardless of their domicile status. The new regime would apply for their first four years of tax residence. This would apply to individuals arriving in the UK as of 6 April 2025 and tax residents, who have been tax resident for less than four tax years, until the end of their fourth year of tax residence.

Qualifying taxpayers would benefit from a 100% UK tax relief on non-UK income and gains arising in the first four tax years of UK tax residence ; they would be able to remit these funds to the UK free of tax. This benefit would have to be claimed on a yearly basis.

After four years of residence, there would be no relief anymore for non-UK income and gains.

Transitional regime for current non-doms

A transitional regime would be introduced for “non-doms”, who have benefited from the non-dom status for more than four years who previously relied on the remittance basis for their non-UK income and gains. This transitional regime must still be clarified but it is expected to include:

• For the 2025/26 tax year, they would pay tax on 50% of their personal non-UK income.

• This would not apply to foreign capital gains, but non-doms could claim a limited step-up for assets held personally. For any capital gains resulting from a disposal of personal assets on or after 6 April 2025 (subject to certain conditions), the acquisition value may be rebased to the value on 6 April 2019 for assets held at that time ("capital gains tax rebasing relief”).

• Non-doms would be able to remit to the UK non-UK income and gains that arose prior to 6 April 2025 at a preferential rate of 12% for the 2025/26 and 2026/27 tax years. Remittance in subsequent tax years would be taxed at the usual tax rates.

The “Temporary Repatriation Facility” is an an incentive to bring unremitted income and gains onshore as soon as possible.

This preferential rate would not apply to income and gains generated within offshore trusts.

And trusts ?

The protection from taxation on future income and gains within trust structures would be abolished for all resident non-doms and deemed domiciled individuals unless they qualify for the FIG regime.

As of 6 April 2025, for qualifying individuals under the FIG regime, non-UK income and gains and certain distributions outside the UK would be entirely exempt during their first four years of UK residency.

For non-qualifying individuals, a transparent taxation would be introduced. Non-UK income and gains arising in non-resident trust structures would thus be taxed on the settlor or transferor if they have been UK resident for more than four tax year, with no further tax on distributions made by the trustees.

Inheritance tax

For inheritance tax, the UK will shift the current domicile-based regime to a residency-based regime with effect from 6 April 2025. Currently, the liability to Inheritance Tax depends on te deceased’s domicile status and the location of his wealth. HMRC will start a consultation abou the design of the system, including the consideration of further criteria such as connecting factors other than residence.

10-years “tail provision”
It is envisaged that an individual’s worldwide assets would fall within the scope of the UK inheritance tax once they have been UK resident for ten years and once they are within the scope of UK inheritance tax, their estate would remain within scope for ten years after the individual ceases to be a UK resident.

Impact inheritance tax on trusts
New trusts and additions to existing trusts made by a resident non-dom settlor on or after 6 April 2025 would also be subject to these new residence-based rules.
However, the current inheritance tax regime would continue for any non-UK property that is settled on trust before 6 April 2025 which opens opportunities.

Conclusion

Individuals who had planned to take up residence in the UK will be reassessing their options. Will the new FIG regime be beneficial for them? And resident non-doms need to check whether they can still qualify for the FIG regime.

Given the 40% inheritance tax rate in the UK, careful estate planning is recommended. If limiting inheritance tax is the main purpose of one's estate planning, countries that do not charge inheritance tax (Austria, Australia, Canada, Estonia, Israel, Latvia, Malta, Monaco, New Zealand, Portugal, Romania, Slovakia, Sweden, ...) or countries that charge inheritance tax at a favourable tax rate (Italy, Spain, Switzerland, ...) may be attractive.

Belgium has relatively high inheritance tax rates but offers many options to get around them.