The non-dom reforms have been the subject of much speculation, and while there will be some good to come out of the Treasury's latest plans, it will be difficult to assess their long-term impact as morenon-doms are expected to leave the UK.
One of the fundamental questions at stake is whether the government should prioritise fairness in the tax system over encouraging wealthy individuals to live and invest in the UK.
At present, non-doms – who, in very broad terms, are individuals whose permanent home is outside the UK – are able to access certain UK tax advantages.
These include being able to shelter their foreign income and capital gains from UK tax, provided they do not remit them to the UK, and not paying inheritance tax on their non-UK assets, provided they are not linked to UK residential property.
Although these rules have sometimes been referred to as loopholes, in reality they have intentionally been included within the UK’s tax code for some time.
A number of other countries such as Italy and Portugal have established similar regimes to attract high-net-worth individuals to move there.
In recent years, the tax advantages for non-doms have eroded away.
For example, when a non-dom has been UK resident for 15 out of the last 20 years they are now deemed to be UK domiciled anyway.
However, it is the removal of some of the remaining benefits – particularly those in relation to IHT – that are causing the most controversy.
As of the Budget announcements, we now have some more clarity over the new rules, which the government still intend to implement from April 6 2025.
The key reforms can be briefly summarised as follows:
- The non-dom regime will be abolished and replaced with a residence-based regime from April 6 2025.
- Individuals arriving in the UK following 10 consecutive tax years of non-UK residence will benefit from an exemption on their foreign income and gains for the first four tax years of UK residence (the 'four-year exemption').
- Those non-doms who have sheltered foreign income and gains from UK tax under the existing rules by keeping them outside the UK can remit those funds into the UK at a temporary special rate of 12 per cent in 2025-26 and 2026-27 (or at 15 per cent in 2027-28).
- Individuals coming to the UK will generally only be subject to IHT in the UK on their UK assets, but after 10 years they will be subject to IHT on their worldwide assets.
- In relation to certain overseas trusts settled by non-doms, several protections from income tax, CGT and IHT will be lost.
Those who were expecting a watering down of these rules – as suggested by a government official in September – have been left largely disappointed.
There are some practical benefits to the proposed reforms however, especially for advisers.
While the intricacies of determining an individual’s domicile made for an interesting intellectual exercise for tax advisers, it often left people in a state of uncertainty about whether HMRC would accept their domicile status in a particular jurisdiction.
Residence, on the other hand, is generally more clear cut, making a move to a residence-based system a welcome simplification of the tax system.
In addition, not many advisers will miss the highly complex rules on when foreign income and gains are remitted to the UK as they sought to protect their clients’ wealth by keeping it overseas.
Indeed, the new regime aims to remove this barrier to bringing money into the UK which exists under the current rules.
HNW balancing act
However, there are concerns that the new regime will not be suitably competitive to attract HNW individuals to the UK because the four-year exemption is not long enough to provide an incentive to move here, or to prevent others from leaving.
The main driver that is leading some non-doms to leave the UK is the changes to the IHT position.
