This article takes another look at the fate of the UK's non-dom regime, and the different approaches of the Conservative and Labour parties on this issue. With an election in the UK now under way, some of the planning for the shape of final legislation has been put on hold.

While the end of the UK’s resident non-domiciled individuals (non-doms) may have been obscured by the political jamboree since Prime Minister Rishi Sunak called an election for 4 July, it remains a concern for HNW individuals and their advisors. We have carried articles trying to get to grips with what the current Conservative government wants to do, and what a potential future Labour government intends, particularly when it comes to the crucial issue of inheritance tax. (See examples of articles here and here.) It is fair to say that there are a few “unknowns.” This does not make tax planning very easy.

That said, there is at least a sort of bi-partisan consensus over removing the non-dom system, one that dates to 1799 when William Pitt the Younger was Prime Minister and the UK was locked in conflict with Bonaparte’s France. Two centuries on, it appears that the system is sufficiently offensive to certain notions of fairness that it is on the way out. (This news service has commented that such a move is a mistake.)

To try and work out the changes, their significance and what clients should consider we carry the following article from Liz Palmer, head of private wealth and Nicole Aubin-Parvu, legal director, at law firm Howard Kennedy. 

Liz Palmer


Nicole Aubin-Parvu

The editors are pleased to share these views; the usual editorial disclaimers apply. To respond and enter the conversation, please email tom.burroughes@wealthbriefing.com

The announcement by the Chancellor [Jeremy Hunt] at the March spring budget that the tax regime for non-domiciled individuals will shift from a remittance basis to a new system based on residence caused a sense of uncertainty amongst non-UK domiciled high net worth/ultra-HNW individuals, as they were left wondering how to best structure their affairs ahead of the upcoming election.  

This uncertainty was increased further by Labour's reply to the Chancellor's proposals published in April. However, the Prime Minister's [Rishi Sunak] announcement on 22 May that the UK general election will take place on Thursday 4 July 2024, and the consequent dissolution of parliament ahead of the election on 30 May, means that for the next two months at least, the Conservatives will be unable to significantly progress their plans for the new regime.  

During their election campaign, the Labour party may provide more detail on their plans for non-doms should they (as is widely anticipated) take power after the election. However, they may prefer to focus on other more mainstream issues.

It is likely to be some time before we have clarity on which party's proposed regime, if either, will become law, and whether there may be any pushback of the April 2025 date for the new regime to take effect. Publication of election manifestos might provide some more clues but complete certainty is some way off. 

As such, this article looks at what both parties have told us to date about their proposed plans for non-doms. It also considers the likely impact of these changes should they take effect as announced, and how HNW/UHNW individuals might choose to navigate the evolving non-dom landscape.

Evolving regime 
The Conservative's key proposal is that the existing remittance basis of taxation should be abolished from 6 April 2025 and replaced with a four-year foreign income and gains (FIG) regime for individuals becoming UK resident after 10 tax years of non-UK residence. 

Eligible individuals, during this four-year period, would be able to bring FIG to the UK tax-free instead of being subject to tax as they currently are. Trust income and gains would also be taxed based on qualification for the four-year FIG regime and non-doms would become taxable on their FIG after four tax years of UK residence.

The Chancellor's plans also involve transitional arrangements, such as taxing only 50 per cent of foreign income arising in 2025/26 and offering a rebasing election for CGT on assets owned on 5 April 2019 to their value at that date. Additionally, there would be a reduced tax rate of 12 per cent on pre-April 2025 FIG brought to the UK for two years after 6 April 2025 through the "temporary repatriation facility" (TRF). This excludes FIG arising in trusts.

The government plans to consult this summer on Inheritance Tax (IHT) changes, but initial proposals indicated that IHT would be charged on individuals' non-UK situs assets once they had been resident in the UK for 10 years and they would continue to be within the scope of IHT for 10 years after departing the UK. 

Property outside the UK settled into trust by a non-UK domiciled settlor before 6 April 2025 would remain "excluded property" and be exempt from IHT. In addition, it might be the case that assets settled within the 10-year grace period for UK residence would also remain exempt post 6 April 2025, pending the consultation outcome. 

Labour’s plans 
In April, Labour responded to the Conservative's proposals with a paper entitled Labour's plan to close the non-dom loopholes. While they generally supported the Chancellor's measures, such as the four-year tax-free period and the 10-year window for IHT, they also proposed that all foreign assets in trusts be brought into the IHT net, regardless of when they were settled. 

They also disagreed with only taxing 50 per cent of FIG in 2025/26 and expressed concerns about the four-year tax-free period for FIG leading to increased foreign, rather than UK, investment. As such, they indicated their plan to find ways to incentivise UK investment during this time and in the future for stockpiled FIG that would otherwise continue to accumulate overseas. 

The state of play 
Over the last 20 years, the UK's non-dom tax rules have become more restrictive and complicated. While further rule changes may not be welcomed by affluent individuals, the proposal by the Conservatives to replace the domicile-based remittance basis with a simpler residence test arguably holds some attractions. 

The idea of a four-year tax-free period for FIG coming to the UK was positive. Additionally, the Chancellor's assurance that property settled by a non-dom into trust before 6 April 2025 would remain excluded property for IHT purposes provided some reassurance to individuals. 

However, Labour's announcement regarding IHT on trusts in particular increased unease, as this is an important tax consideration for non-doms relocating to the UK. Indeed, taxing all overseas assets in trust, regardless of when they were settled, could be a deal-breaker for many non-doms with significant assets abroad, possibly acquired, or inherited years before coming to the UK. 

Planning for the future
The uncertainty created by the different proposals, together with the forthcoming election makes planning for non-UK domiciled HNW/UHNW individuals very difficult. However, those affected could use this time to look closely at their asset position and make some principled decisions about their ongoing financial needs in the UK.  

If Labour do form the next government, and do not backtrack to some extent on their proposals for all foreign property to become subject to IHT after 10 years of UK residence, a potential strategy for wealthy individuals moving to the UK may involve short-term UK residence of up to 9 years and 364 days. Under current plans, departure within this period would have to be followed by at least 10 years of residence outside the UK to avoid potentially falling into the IHT net on or shortly after return. 

Individuals considering relocating to or staying in the UK might also contemplate divesting foreign assets by gifting them to non-UK based family members or exploring structures like trusts or family investment companies from which they would be excluded as beneficiaries. This approach would allow them to retain some control over assets, while minimising taxable impact. In short, non-doms may begin to look at using similar strategies and structures to those used by UK residents. 

Ultimately, non-doms residing in the UK may postpone final residence decisions until after the General Election, allowing time for legislative consultation. However, contingency plans should be considered during this period of uncertainty.

In the meantime, it seems that prospective UK residents are starting to look at other destinations that are perceived to be more wealth-friendly than the UK, such as the UAE or Italy. This highlights the importance for the next government of finalising their plans as quickly as possible following the election. However, they must also make sure to strike a careful balance between their desire to raise tax revenue from non-doms and the risk of causing potential harm to the UK economy by deterring foreign investment.