The UK bids bye-bye to the non-dom rules – but it’s not all bad news

Emotions were a bit low after the March 2024 announcement that the UK non-domiciled (“non-dom”) tax rules pertaining to the remittance basis of tax for individuals will be abolished with effect from 6 April 2025. But all hope is not lost! A few new opportunities have arisen for individuals emigrating to the UK which could lead to some very beneficial tax planning. Just a caveat at this stage of the game, the announcements have not been legislated yet, and the UK election in November might also have a big influence on what will actually be implemented going forward.

The UK has for many years had this weird tax rule where you could be regarded as tax resident in the UK for local income but not really tax resident or subject to tax, for foreign income.  Essentially the non-dom rules apply to  people who’ve been living in the UK for long enough to trigger tax residency but are not regarded as “domiciled” in the UK because they were not born there, did not choose the UK as their permanent/indefinite home, or have not settled in the UK for long enough to be “deemed domiciled”.

It has been a very beneficial and thus much-debated regime because the non-dom rules means you can choose not to be taxed on any foreign income that you do not bring into the UK (the so called “remittance basis” of tax), i.e. you don’t pay UK tax on any foreign income you keep outside the country. As a non-dom, you also only pay UK inheritance tax on assets situated in the UK on your death. Compare this beneficial tax situation to persons who are UK resident and domiciled who are liable to pay income tax and inheritance tax on their world-wide income, and you can clearly see the benefits.

Over the years the non-dom regime has evolved, in line with regulatory changes aimed at enhancing tax transparency and bringing the non-dom regime closer to the tax resident domiciled regime. For instance, the introduction of the “deemed domiciled” rules in 2015 shortened the time period of having the non-dom benefits. Over time the tax gap between UK domiciled residents and non-doms were slowly closing. Therefore, the recent announcement in the Spring Budget was not completely unexpected.

The not-so-beneficial replacement regime is set to abolish the non-dom regime and is based on a four-year exemption period for people becoming tax resident in the UK. Practically, the new regime means that for the first four years after an individual becomes UK resident, foreign income and gains will be exempt from UK tax, whether or not the income and gains are brought into the UK. In other words – no more remittance basis! This exemption can also apply to distributions from non-UK resident trusts to UK resident beneficiaries in the four-year period, so this may be an important lever for tax planning.

Non-dom UK residents who have previously been taxed on the remittance basis will be able to elect to remit foreign income and gains that arose before 6 April 2025 to the UK at a reduced tax rate of 12% until 5 April 2027, regardless of whether they have been UK tax resident for four years or longer. This relief is however not available for income and gains made before 6 April 2025 which were earned by trusts and trust structures.

The system of matching (pre-6 April 2025) foreign income and gains to trust distributions, so that there would normally be a tax event on distribution even when the distribution from the trust is sourced from capital, will continue. But now, beneficiaries who are within the four-year exemption period can receive benefits from a non-UK trust from 6 April 2025 free from any UK taxes, notwithstanding the matching rules. What a great opportunity!

So we know that a main benefit of these rules is that people emigrating to the UK will for the first four years of being tax resident in the UK be exempt from tax on foreign income, gains and foreign trust distributions, even when remitted into the UK.

Just thinking of an example from a South African (“SA”) perspective, under the old regime a person emigrating to the UK from SA who owned a Unit Trust, would have had to collapse the Unit Trust before his/her formal emigration to avoid paying double tax. You see, in SA the tax on the withdrawal from a Unit Trust would be paid in SA from within the Unit Trust, while the receipt by the emigrant of the proceeds of the Unit Trust when he/she is in the UK, would be subject to tax at the respective income tax rates. Following the expected changes, the four-year break would allow the emigrant to withdraw his/her funds from the Unit Trust in his/her own time within the four-year period, without paying income tax in the UK. Just remember that there will still be exit tax on the Unit Trust when ceasing SA tax residency.

For UK non-doms who do not qualify for the four-year tax break, because they have for example been tax resident in the UK for four years already, but still make use of the remittance basis, a benefit exists until 5 April 2025 to only pay tax on 50% of their foreign income (excluding gains).

Non-doms who have previously claimed the remittance basis of taxation will qualify for a base cost uplift on personal assets as at 5 April 2019, in respect of disposals on or after 6 April 2025.

Although the abolishment of the remittance basis in the UK is overall a big headache for many UK non-dom tax residents, there are still some tax breaks to take advantage of, especially for persons who emigrated to the UK in the four years preceding 6 April 2025.