This article sets out the fine details of what the end of the non-dom system in the UK entails, the remaining areas of uncertainty that (hopefully) will be cleared up in the 30 October Autumn Budget.

There has, as our UK readers know, been much talk about what the Autumn Budget of 30 October means for HNW individuals. There has been speculation over the finance minister's intentions on resident non-domiciled persons (non-doms) and, in particular, the treatment of trusts and inheritance tax. Depending on whether the abolition of non-dom status is accompanied by a tight treatment of IHT, or not, is the risk of a further flight of non-doms to overseas destinations.The Budget is also likely to see hikes to capital gains tax.

To discuss these issues is Anna Warren, tax director, Bentley Reid, a UK wealth management firm. The editors are pleased to share these views; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com 

When the Conservative government announced the huge overhaul to the UK “non-doms” tax system in the March 2024 Budget, it intended to consult on the least popular tax – inheritance tax (IHT). It also promised to continue the rules for existing trusts, essentially “grandfather” them in respect of IHT. For all intents and purposes, the Conservatives “pre-empted” what would be a key Labour manifesto pledge, given their comments over the last 10 to 15 years, calling an intentional and legitimate regime a “loophole.” 

The UK’s non-dom regime was so popular that other European countries tried to bring in their own, simplified versions – Portugal and Italy being the most popular.  

Broadly the current rules are: 

-- Concept based on “domicile”; 
--15 years on “remittance basis” for income tax and CGT;
-- Remittance basis – taxed on UK source income on arising basis. Foreign income and gains taxed if “remitted” to the UK;
-- Free until seventh year of residence; and
-- 15 years where foreign situated assets are exempt from IHT. If set up prior to becoming deemed domiciled, then a trust can be set up to protect from IHT on non-UK situated assets and broadly foreign income and gains only taxed when a distribution is made. 
    
So what are Labour’s proposals? 
-- Removal of domicile concept and instead based on tax residency; 
-- Four years for new arrivals (broadly non-resident for previous 10 years) to be exempt from tax on foreign income and gains. No concept of remittance so this money can be brought to and spent in the UK as and when the individual chooses;
-- Individuals subject to IHT after 10 years of residence, including offshore trusts (existing or new);
--10-year “tail” for IHT, so individuals potentially still subject to IHT up to 10 years after non-residence;
-- Temporary Repatriation Facility for “non-remittable” income and gains. Two years to bring into the UK and only pay 12 per cent; and  
-- Removal of “protected trusts,” so settlors who are UK resident for at least four years will be taxed on underlying income and gains on an arising basis. 

Why is Labour trying to change these rules now? What brought on this change?  

Labour has used the non-doms [regime] to attack Conservative policy whilst in opposition and so now they are finally in power after 14 years, they have the chance to implement it.

Who are the winners and losers?
-- Surprisingly, there will certainly be winners and people who benefit from these changes. Currently, UK-domiciled individuals who leave the UK face uncertainty as to whether they are inside or outside IHT due to the complexity of domicile. These changes will bring clarity by basing this on years of residency, so individuals will know clearly whether they are in or out.  

-- The biggest issue for most non-doms (as well as UK doms) is IHT. Whilst the Conservative government said it would consult on any IHT changes and would delay them being introduced until April 2026, Labour wants to press on and introduce all changes from April 2025.  

-- The listening events over the summer, together with the realities that many non-doms are looking to leave should the 10-year IHT tail be introduced, has perhaps led Labour to think again at how far the new government can push to tax non-doms before they lose instead of raise tax. There has been a huge amount of concern for this reality in recent times and we expect some concessions from Labour on what is introduced. 

So what might we see and what is important?  
-- We are likely to see:

-- Grandfathering for existing trusts for IHT; 
-- 10-year tail for non-doms reduced to less than five years; 
-- An extension of exemption on FIG (foreign income and gains) for four years to include UK income and gains and potentially extend the period to perhaps seven years; 
-- Introduction of a temporary “repatriation facility” whereby non-doms pay a one-off tax (12 per cent proposed by the Conservatives) to bring in non-remittable FIG. This should not require actual remittance to the UK, which would be very complex for certain less liquid assets, but instead require a simply “nomination.” It should also include FIG within trusts; and 
-- Labour is also now talking about introducing some kind of taper relief, which was previously announced by the Conservatives but rejected by Labour previously. This might be in the form of a 50 per cent cut in tax on FIG for non-doms past the four years of residence but under 15.  

IHT changes will be key for non-doms – many of whom are globally mobile – so the opportunity to move to Italy (fixed tax per year and the risk of only 4 per cent IHT after 15 years), or Dubai (no personal taxes) may seem too appealing.