Overhaul of UK Non-Dom Tax Status: What Does It Mean for Non-Domiciled Individuals?

The UK government has revealed plans to replace its long-standing resident non-domicile (non-dom) tax regime with a new Foreign Income and Gains (FIG) system, set to take effect in April 2025. This significant change in UK non-dom tax status follows the previous administration's March 2024 announcement to abolish the remittance basis and the domicile concept.

What Are The New Changes of UK Non-Domicile Status?

Key points of the new system include:

1. A four-year FIG regime allowing new UK residents to remit foreign income and gains tax-free for up to four years.
2. A shift to a residence-based inheritance tax (IHT) system, replacing the current domicile-based approach.
3. Changes to the tax treatment of trusts, particularly those settled by non-domiciled individuals.
4. Transitional provisions, including a one-year 50% reduction in foreign income taxation for certain individuals.
5. A temporary repatriation facility (TRF) allowing individuals to pay a reduced 12% tax rate on pre-April 2025 FIG remittances for two years.

The government aims to provide clarity through a technical note, outlining the main changes for non-domiciled individuals already resident in the UK and those moving to the UK.

Under the new residence-based IHT regime, the primary criterion will be whether an individual has been a UK resident for ten years before the tax year of the chargeable event. This change will significantly impact existing trusts, particularly those settled by non-domiciled individuals before April 2025.

While some existing excluded property trusts may retain their IHT protection, new trusts and additions to existing trusts after April 5, 2025, will fall under the new regime. Settlors who don't qualify for the new four-year FIG regime will face changes in the taxation of trust income and gains.

The government has announced a consultation process to address the design of the new residence-based system, transitional provisions, and other detailed issues. The full implications of these changes are expected to become clearer following the Budget announcement on October 30, 2024.

This overhaul of the UK's tax system for non-domiciled individuals represents a significant shift in policy, with potential far-reaching consequences for wealthy international residents and the UK's attractiveness as a destination for high-net-worth individuals.