Implications of the Changing Non-domicile Regime

Published: 01/07/2024 07:00

On 6 March 2024, the Government announced a major overhaul of the regime for the taxation of non-doms in the United Kingdom (UK). These changes will impact all high net worth UK residents whose domicile for tax purposes is outside the UK (‘non-doms’) but may have a particularly significant impact on non-doms divorcing in the UK.

Some of the previously well accepted planning for non-doms on divorce will no longer be available after the introduction of these changes.

There are two major changes:

(1) From 2025/26 non-doms will no longer benefit from being able to shelter their income and gains from taxation in the UK.

(2) Offshore trusts settled by non-doms will no longer be protected from income tax and capital gains tax.

Essentially, almost all of the tax incentives presently available for non-doms will be removed.

These rules will be effective from 6 April 2025, however transitional rules will apply, which may provide some benefit for those who are planning remitting funds into the UK over the next few years.

This article will:

  • review the current rules;
  • detail the proposed new rules; and
  • run through a case study.

Please note that there is no actual legislation at this time, so this article is based on the following information:

  • Spring Budget 2024 and Spring Budget 2024: Policy Costings.
  • HMRC: Spring Budget 2024: Overview of tax legislation and rates (OOTLAR).
  • HMRC Technical note: Changes to the taxation of non-UK domiciled individuals Updated 7 March 2024.

As there is a lack of technical detail available, this article offers a general overview of the changes and some things to be aware of.

What is the current non-dom regime and how does it benefit divorcing couples?

Briefly, the current non-dom regime allows people who are living in the UK, but non-UK domiciled, to exclude their non-UK income and gains from UK taxation – this is called the remittance basis. The overseas income is not subject to tax in the UK, providing the money is not bought (remitted to) the UK.

Non-doms can benefit from this regime for the first 15 years that they are living in the UK. Once a person has been living here for 7 years, there is a charge to claim the remittance basis.

If a couple are divorcing and one or both of them are non-doms, there is a way to structure the settlement so that funds can be remitted to the UK without incurring a tax charge.

Illustration

Elias and Ava are married Swedish nationals living in the UK. They are both non-UK dom. They have been living in the UK for 10 years. Elias claims the remittance basis.

The divorce settlement required Elias to transfer £5m to Ava. This £5m is made up of income and gains that Elias has earned whilst UK resident.

If Elias brings (‘remits’) that money into the UK, he will pay tax on the income at 45%. The £5m would therefore be £2.75m once the relevant taxes have been paid.

A remittance is one that benefits the individual or a relevant person to the individual (including family members). If the money remains offshore there is no remittance. If the money does not benefit the individual or their family members there is no remittance.

Under the current regime Elias can transfer the £5m from his offshore account to Ava’s offshore account and Ava can remit this money to the UK once the divorce is finalised (i.e. once the decree absolute or (for divorce applications post-dating 6 April 2022) the Final Order has been issued). Once the divorce has been finalised, Ava is no longer a relevant person to Elias and therefore a remittance by Ava does not count as a remittance for Elias.

There are certain caveats to this and full advice should be taken. However, this is one structure that non-doms divorcing in the UK utilise to structure their settlements. Note that HMRC have stated that this structure is under review by them. However, there has been no consultation or change in legislation.1 At note 1 there are also details of the HMRC letter approving the structure from 2012.

What is the proposed regime?

The changes are due to take effect from 6 April 2025, when a new regime will abolish non-dom status for income and gains. Individuals will then be subject to tax on all their worldwide income and gains regardless of their domicile status. This does not mean an immediate tax charge on all non-doms; it means that from 6 April 2025 any income and gains earned from that point on will be subject to tax in the UK if the individual is resident in the UK.

There will be a new foreign income and gains (FIG) regime. This is for new residents in the UK. It allows them to exempt any foreign income and gains from taxation for the first 4 years that they are living in the UK. There is no requirement that this money is kept offshore.

What are the transitional rules?

There will be a one-off relief for the tax years 2025–26 and 2026–27. This is called the temporary repatriation facility (TRF). This relief is a 12% rate of tax for remittances of certain foreign income and gains made in 2025–26 and 2026–27.

Non-doms who move from the remittance basis to the arising basis on 6 April 2025 (and not eligible for the 4-year FIG rules) will only pay tax on 50% of their foreign income for 2025–26.

For disposal of assets, after 2025–26, capital gains tax rebasing will apply. This means that sales of overseas assets will be calculated using the value of the asset at April 2019 as the base cost if the following conditions are met:

(1) the individual has claimed the remittance basis;

(2) the individual was non-dom at 5 April 2025;

(3) the individual disposes of the asset post-April 2025;

(4) the individual owned the asset at 5 April 2019.

How will this impact divorcing couples?

It will have no impact for couples who are UK domiciled. For couples where one or both of the parties are non-doms these changes may impact how settlements are structured in a tax-efficient way.

The timing of the settlements will directly impact which set of rules the individuals are under.

Previously, if funds were held offshore and the individual claimed the remittance basis the income and gains were not taxed in the UK. These rules will change that. It does not mean that the tax will always apply as some of the income or gains may be exempt to tax or given foreign tax credits under certain double tax treaties.

The non-dom remittance regime was quite clear cut: not in the UK, not taxable. Under the new rules, any income or gains earned whilst resident in the UK could be taxed in the UK regardless of if the funds are brought into the UK or not. It’s going to be more complicated for non-doms to estimate their tax position in the UK – at least for the first few years.

Further, previously some assets overseas could be ignored for capital gains tax purposes, in the UK, if the individual would keep the funds outside the UK, there would be no tax charge in the UK. From 6 April 2025, assets sold overseas will be subject to capital gains tax in the UK if the individual is living in the UK.

Timeline and rules

The timing for remittances is different for capital gains and transfers of assets. In some cases, the tax point for the transfer of the asset is the date of the court order rather than the date that the assets have been legally transferred. For a transfer of cash, the individual will be subject to the tax rules in place at the point of the transfer or remittance. If an Order states that X will transfer £5m to Y and this is dated March 2025 (current rules) but the transfer takes place in May 2025 (new rules), X will be taxed according to the rules in place in 2025–26.

For the transferring spouse this means there is a tax risk if the transfer is delayed. However, it would not be wise to rush the transfer as the structuring outlined above only works because the two parties are no longer connected (which is only the case after the Final Order).

Present to 5 April 2025

Rules regarding non-doms remain as they have always been.

6 April 2025 to 5 April 2027

If the individual qualifies for the 4-year FIG regime there is no tax on funds brought into the UK.

If the individual is a former non-dom, they may be able to remit certain income and gains and pay a tax rate of 12% on the money remitted.

From 6 April 2027 onwards

If the individual qualifies for the 4-year FIG regime there is no tax on funds brought into the UK.

For individuals who have been living in the UK for over 4 years they will be subject to tax on their worldwide income (regardless of where the money is kept).

Will there be more uses of trusts?

Trusts have often been used in the past to protect foreign sourced income and gains. However, from 6 April 2025 the protection from tax on income and gains in offshore trusts will no longer be tax protected.

There will also be changes to the inheritance tax regime. Inheritance tax will be payable by an individual who has been resident in the UK for 10 years and if they have left the UK and have not reached 10 years non-residence.

Some of the transitional rules include that trusts that are settled by a non-UK dom settlor prior to 6 April 2025 will be exempt from UK inheritance tax (IHT). There may be an increase in these trust structures for IHT planning.

Practically speaking what might the non-doms do?

Residence will become a major tax planning tool for high net worth (HNW) and ultra high net worth (UHNW). With the right planning and reduced ties to the UK, some individuals will be able to spend up to 6 months in the UK without triggering UK residency. As a non-resident, individuals are only taxed on their UK-sourced income.

Some HNWs and UHNW will leave the UK – the actual impact of this is unknown, however, if your clients are going through a divorce it will be an important question to ask.

The tax position for UK residents versus non-residents is very different and therefore for a tax report to be accurate the adviser will need to know the residency position of both parties.

What are the unknowns?

A lot. These changes were announced by a Conservative Government. A general election is being held on 4 July 2024. Labour have announced that they would keep most of the changes announced with some changes. However, even for these changes, we have no draft legislation yet. Per the latest publication by the Government, regarding these rules ‘further updates and draft legislation will be published later in the year for technical comments’.

Takeaways

The single biggest takeaway from these changes is that the landscape for non-doms is changing. Settlement structuring to benefit from the remittance basis will no longer be available from 6 April 2027. It may still be possible to utilise it in the transitional years.

As a result, for the tax years 2025–26 and 2026–27, non-doms may seek to bring significant sums into the UK, to benefit from the 12% rate.

Some individuals may leave the UK and this will drastically change their tax position here.

Timing matters. If you are advising clients who are non-dom, and they require a tax report to consider when a potential settlement could be made, consider asking the following questions:

  • What will the tax position be if the settlement is affected on or before 5 April 2025?
  • What will the tax position be if the settlement is affected between 6 April 2025 and 5 April 2027?
  • If seeking a capital gains tax report for a non-dom, will the report need to set out the position of a sale pre 5-April 2025 and post-5 April 2025?

Tax uncertainty may create certain challenges for HNW and UHNWs. It may also encourage some individuals to come to the UK since the new regime is more attractive for wealthy foreigners who will be able to benefit from a tax exemption and use the money in the UK.

The tax landscape for wealthy individuals will change over the next 3 years which may create additional layers of complexity when advising on divorce. Seeking advice or utilising the tax adviser of the party will be important to ensure that tax liabilities are not understated.

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