There's a wide silver lining to the regime which has replaced the UK's resident non-domicile system, the author of this article argues.

The following article from Jeremy Coker (pictured below), a partner at Oury Clark Chartered Accountants, argues that the demise of the UK’s resident non-domicile system, and replacement with a different residency regime is far from being a negative development. The editors are pleased to share these views and hope they stir up debate. The usual editorial disclaimers apply to guest writers’ views. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com if you wish to comment.

Jeremy Coker

Since April last year, there has been a lot of uncertainty surrounding the UK’s new regime for non-domiciled individuals. Many are questioning what the new rules mean in practice, and lots of the stats and stories are conflicting. 

While much of the press coverage has focused on fears of a wealth exodus, the reality is much more nuanced – and in some cases optimistic: the UK’s new rules may encourage some expats to return under more favourable tax rules.

This is due to two key changes: the new four-year Foreign Income and Gains (FIG) rules and updated inheritance tax (IHT) treatment for returning individuals. 

What are the new FIG rules?

Under the new regime, individuals who haven’t been UK tax resident for the last 10 years and choose to become one can benefit from a four-year tax exemption on their foreign income and gains. This means that they can come back to the UK, reconnect with family, live and work here without being taxed in the UK on non-UK income and gains for those initial four years. They can also bring foreign funds into the UK if they wish without suffering a UK tax charge,

This is a big change. Many HNW individuals with significant offshore income previously avoided the UK due to the tax exposure their tax residence would trigger. Under the current system, they potentially have four years, giving them breathing room to restructure, or simply enjoy time in the UK without an additional financial penalty. 

This means that many individuals who previously avoided visiting their friends and/or family members or spending time in the UK for fear of triggering UK tax residency are now presented with a chance to visit/come home.
 

What about inheritance tax?

The other major development is around inheritance tax. Before the changes, some UK-born individuals returning to the UK became subject to IHT on their foreign assets after just one year of living in the UK. That exposure now only begins after 10 years of UK tax residency, consequently returning expats (who have not been tax resident in the UK in the 10 preceding years) have a much longer window to get their estate in order. This offers certainty and time, which are both critical when managing intergenerational wealth.  

Challenges and opportunities

This isn’t to say that non-dom individuals, particularly those who have been UK resident for more than four years, aren’t facing a major shift. 

But for long-term expats, the changes open new doors: they can now come to the UK, spend more time with family/friends, and potentially work or invest –without suffering UK tax on their offshore income brought into the UK. 

Currently UK resident individuals, who are globally mobile and have significant non-UK assets may also now find it easier to plan to mitigate IHT. 

None of this tax planning should, however, be done without considering the taxation consequences for the individual in their other jurisdiction. 

What does this mean for wealth managers?

For advisors and wealth managers, the new regime creates an opportunity to engage with clients who had previously avoided the UK due to tax constraints but may now be open to a conversation.

Of course, the new rules are complex and not without pitfalls, but the “wealth exodus” headlines don’t paint the whole picture.

Indeed, there has also been an influx of long-term expats returning to the UK for various reasons. 

Expats who felt shut out of the UK for years may now see a route home, with four years of UK tax freedom on foreign income and gains and 10 years before global assets become exposed to UK IHT. For the right individuals, under the right circumstances, the UK may now look more attractive than ever before.