What Are the Key Changes to Non-Dom Taxation?
1. End of the Remittance Basis
Currently, non-domiciled individuals who qualify for the remittance basis of taxation only pay UK tax on their UK income and gains, while foreign income and gains are taxed only if brought into the UK.
From April 2025, this system will be abolished, meaning that all UK tax residents—regardless of their domicile status—will be taxed on their worldwide income and gains as they arise.
Implications:
- Individuals who previously structured their finances to keep foreign income offshore will now need to declare and pay UK tax on these earnings.
- Any unremitted foreign income from previous years could still be taxable if brought into the UK.
2. Introduction of a Temporary Foreign Income and Gains (FIG) Regime
To encourage new arrivals to the UK, the government will introduce a four-year Foreign Income and Gains (FIG) regime.
This new system will allow individuals who have not been a UK tax resident in the previous ten consecutive tax years to pay no UK tax on foreign income and gains for their first four years of residence.
Who Benefits from This?
- New UK arrivals will receive a 100% tax exemption on foreign income and gains for their first four years.
- Those already in the UK under the non-dom regime may consider relocating and requalifying after a period of non-residence.
3. Inheritance Tax (IHT) Changes – Shift to a Residency-Based System
One of the most controversial elements of the tax reform is the proposed change to how Inheritance Tax (IHT) is applied. Currently, IHT applies only to UK assets for non-domiciled individuals.
Under the new rules, from April 2025, IHT will be based on UK residency rather than domicile. This means:
- Individuals who have lived in the UK for 10 out of the past 20 years will now be subject to UK IHT on their worldwide assets.
- Previously, long-term non-doms who were classified as "deemed domiciled" had some tax advantages—these will no longer apply.
- Assets held in offshore trusts may no longer be protected from UK IHT liabilities.
Potential Consequences:
- Families with significant overseas assets may face a 40% tax on estates above the £325,000 IHT threshold.
- Trust structures may need to be revisited to ensure tax efficiency.
- Some individuals may relocate to lower-tax jurisdictions before reaching the 10-year threshold.
What Can Be Done to Mitigate These Changes?
For individuals affected by these tax reforms, proactive tax and estate planning is essential. There are still a number of strategies available to legally minimize exposure to UK tax liabilities under the new rules.
1. Reviewing Offshore Trust Structures
- Offshore trusts that previously shielded assets from UK tax may need to be restructured to comply with new IHT rules.
- Some trusts may still offer advantages in protecting family wealth, but expert review is recommended.
2. Reassessing Residency and Relocation Options
- Individuals with substantial non-UK assets may consider spending fewer than 10 years in the UK to avoid falling into the new IHT scope.
- Certain countries offer attractive tax incentives for expatriates, such as Portugal, Italy, and the UAE.
3. Structuring Income and Investments Efficiently
- Foreign income and gains will now be fully taxable in the UK—however, strategies such as offshore investment bonds or trusts may help in tax deferral.
- Certain investment products still offer tax-efficient options for wealth preservation.
4. Life Insurance as an IHT Solution
- Whole-of-life insurance policies can provide liquidity to cover IHT liabilities, preventing the need to sell valuable assets.
- Structuring policies within trusts can ensure tax efficiency.
Market and Business Reactions
Wealthy Individuals Reconsidering UK as a Tax Base
The UK’s appeal as a destination for high-net-worth individuals (HNWIs) has long been linked to its non-dom regime, which allowed significant tax advantages. With these reforms, some experts predict that wealthy individuals may relocate to other jurisdictions with more favourable tax policies.
- Luxury property markets in London may see a slowdown, as non-doms reconsider UK investments.
- Luxury goods and private banking services may also be impacted by the outflow of wealthier residents.
The Government’s Rationale
The UK government argues that these reforms are necessary to close tax loopholes and ensure that all residents contribute fairly to the tax system. However, critics warn that losing high-net-worth individuals could harm the economy, reducing investment and spending in key sectors.
Final Thoughts – Planning for the Future
With these changes taking effect in April 2025, individuals affected by the reforms need to act now.
- Reviewing current financial and estate planning strategies will be crucial.
- Exploring alternative jurisdictions or tax-efficient structures may help mitigate tax exposure.
- Seeking expert advice on trusts, offshore investments, and IHT planning can help safeguard wealth for future generations.
As these new rules reshape the financial landscape for non-doms in the UK, taking proactive steps now can make all the difference in securing long-term financial stability.