Overhaul of non-dom tax status – What does it mean for those affected?
You may have already heard that the Chancellor, Jeremy Hunt, has announced an end to the preferential tax treatment that non-domiciled individuals (non-doms) currently receive.
At the moment, a non-dom – someone living in the UK but domiciled in another country – has two options when it comes to taxation.
They can opt to be taxed on the remittance basis, where they only pay UK taxes on foreign income and gains that are brought into (remitted to) the UK.
They do not need to pay UK tax on their foreign income and gains that are kept outside the UK.
However, once an individual has been resident in the UK for seven out of the previous nine years, they must pay a Remittance Basis Charge (RBC) of £30,000.
If they have been resident for 12 of the previous 14 years, they must pay an RBC of £60,000.
Alternatively, non-doms can choose to be taxed on the arising basis, where they are taxed on their worldwide income and gains, regardless of whether the money is brought into the UK.
They might choose this option if their overall tax payments would be less than having to pay the respective RBCs.
However, the new rules for non-doms change everything.
The Spring Budget 2024 specifically targeted non-doms
The Chancellor targeted non-doms in his Spring Budget speech on 6 March, saying: “We will abolish the current tax system for non-doms, get rid of the dated concept of non-doms and we will replace the non-dom regime with a modern, simpler system from April 2025 based on residency.”
The Government plans to effectively end the current non-dom system in favour of a new residence-based regime.
New residents of the UK will remain as non-doms for the first four years of their residency, after which they will become domiciled and be required to pay UK taxes on their worldwide income.
Before, an individual could remain non-domiciled for 15 years – with careful planning.
This four-year rule only applies if the individual can demonstrate a consecutive period of 10 years as a non-resident of the UK before their arrival.
Crossing over to the next regime
For those individuals currently deemed as non-doms, there will be a transition period to the new scheme.
Non-doms who do not qualify for the new regime will only be required to pay tax on 50 per cent of their foreign income for that year, though this does not extend to profits from the sale of foreign assets.
Additionally, those owning foreign assets will have the option to adjust the base value of these assets to their market value as of April 5, 2019, for any sales occurring after April 6, 2025, meaning tax will only be due on any increase in value from that date.
To encourage the movement of overseas wealth into the UK, a temporary repatriation facility will allow current non-doms to bring pre-April 2025 foreign income and gains into the UK at a reduced tax rate of 12 per cent for the years 2025/26 and 2026/27.
A quick note on changes to Overseas Workday Relief (OWR)
The OWR currently provides a tax advantage for non-doms working in the UK, as it allows them to claim relief on income tax for earnings related to their duties performed overseas.
Starting in April 2025, the Overseas Workday Relief (OWR) framework will also see significant simplification, introducing an accessible four-year scheme for those who qualify.
This development aims to make the UK more attractive to international talent by offering more straightforward tax relief opportunities.
While full details are still pending, it has been confirmed that eligible individuals will benefit from income tax relief on the portion of their salary related to duties performed abroad during the first three years of UK residency.
Moreover, the existing barriers to repatriating these earnings to the UK will be eliminated, further enhancing the appeal of the OWR scheme to overseas professionals.
What should you do now?
If you are currently classified as a UK-based non-dom when it comes to your global taxes, you’ll need to reconsider your strategies.
If you wish to remain in the UK, you will need to work out whether you are eligible for any of the transitionary schemes available and if you will be required to pay full UK taxes once the legislation comes into effect.
You might have to adjust the way you structure your current finances and plan for future liabilities in the years to come.
You will also need to:
- Review and possibly restructure your investments: Analyse your investment portfolio to identify opportunities for tax-efficient structuring under the new rules.
- Explore gifting and Inheritance Tax planning: To mitigate potential tax liabilities, review your gifting strategies and inheritance planning. Transferring wealth to non-domiciled partners or heirs under the current rules might offer tax advantages.
- Reinvestment in UK-based assets: The changes might provide an impetus to reassess your investment focus. Reinvesting in UK-based assets or your business could not only align with the new tax regime but also potentially benefit from certain tax reliefs and incentives for UK investment. Incidentally, the Chancellor announced the addition of the British ISA during his Spring Budget speech, which might allow you to make £5,000 of tax-free investments in British companies.
- Diversify your income sources: Diversifying your income sources, especially by increasing the proportion derived from UK sources or tax-exempt investments, could reduce your overall tax burden under the new regime.
- Re-evaluate your residency status: For some, it might be worth reconsidering your residency status in the UK and moving elsewhere if necessary. This is a complex decision with far-reaching implications, not just for taxes but also for your personal and professional life.
In any case, you should always discuss your tax liabilities with a qualified and experienced tax adviser.
We can help you mitigate your taxes, reduce your liabilities, and save money.
