Traditionally, non-domiciled individuals (non-doms) – individuals residing in the UK but domiciled elsewhere – had the advantage of choosing how they were taxed on foreign income.
This choice included either the remittance basis, paying UK taxes only on income brought into the UK, or the arising basis, where global income and gains were taxed.
However, a significant overhaul was recently announced by Chancellor, Jeremy Hunt, in the Spring Budget 2024 which is set to change this.
The changes aim to simplify the system and charge tax based on residency from April 2025.
Under the new system, non-dom status will be limited to the first four years of UK residency.
After this period, individuals will be required to pay UK taxes on their worldwide income – a big shift from the previous system where you had the possibility of extending your non-dom status for up to 15 years (using strategic planning, of course).
The Spring Budget also introduced a transition phase for current non-doms, offering a reduced tax requirement of 50 per cent of their foreign income for the initial year under the new regime, although this concession does not apply to profits from the sale of foreign assets.
(More on the transition stage below).
Strategies for non-doms navigating the transition
During the transition to the updated system, individuals currently identified as non-domiciled will experience a period of adjustment.
Those not meeting the criteria for the forthcoming regulations will be subjected to tax on just half of their foreign income for that year, excluding any earnings from the disposal of foreign assets.
Moreover, asset owners abroad have the opportunity to recalibrate the foundational value of these assets to their market price as of April 5, 2019, for transactions occurring after April 6, 2025.
This adjustment means that tax obligations will arise only on value increments beyond this date.
In a bid to facilitate the transfer of international assets to the UK, a special repatriation mechanism will also be available for existing non-doms.
This mechanism permits the introduction of foreign income and gains predating April 2025 into the UK at a lowered tax rate of 12 per cent during the fiscal years 2025-26 and 2026-27.
For non-doms already residing in the UK, the changes require a strategic re-evaluation of your tax planning and financial management. Here’s what you need to consider:
- Investment portfolio adjustment: It’s imperative to assess your investment strategy to align with the new tax regulations, potentially restructuring to maximise tax efficiency.
- Inheritance Tax planning and gifting: With the impending changes, revisiting your inheritance and gifting plans can uncover opportunities to minimise tax liabilities, particularly in transferring assets to non-domiciled partners or heirs.
- Focus on UK assets: The revised tax regime may serve as an incentive to pivot investment focus towards UK-based assets, which could be more favourable under the new rules and possibly benefit from tax reliefs aimed at encouraging UK investments.
- Diversify your income: Adjusting the composition of your income to increase UK-sourced earnings or investing in tax-exempt options could substantially reduce your tax burden.
- Residency reconsideration: Given the substantial overhaul, it may be worth evaluating whether maintaining UK residency aligns with your personal and financial objectives, considering the broad implications of these tax changes.
As the April 2025 implementation date approaches, taking proactive steps to align with the new rules will be crucial for both non-doms currently residing in the UK and individuals who wish to move to the UK in future.
Engaging with a qualified tax adviser to navigate these changes, understanding your options, and reconfiguring your tax and financial strategies is something we are advising all our clients to do as soon as possible.
We recommend you do this too.