The UK tax landscape for non-domiciled individuals (‘non-doms’) and inheritance tax (‘IHT’) is on the cusp of a major overhaul. Announced in the Autumn Budget 2024 and set to take effect from 6 April 2025, these reforms mark a significant shift from a domicile-based system to one rooted in tax residency. For non-doms, long-term UK residents, and those with international assets, understanding these changes is crucial for effective tax planning. This article explores the key reforms, their implications, and steps individuals might consider within the limited time frame before the new rules kick in.
The End of the Non-Dom Regime
Historically, non-domiciled UK resident individuals with a permanent home (domicile) elsewhere enjoyed preferential tax treatment. They could opt for the remittance basis, paying UK tax only on income and gains brought into the country, while their worldwide assets remained largely shielded from IHT unless they became “deemed domiciled” after 15 of the prior 20 years of UK residency. This system, rooted in the nebulous concept of domicile, often led to complex planning and uncertainty.
From 6 April 2025, this regime will be abolished. The concept of domicile will be removed from the UK tax system and will be replaced by a residency-based framework. This shift aims to create a fairer, more transparent system, ensuring long-term UK residents contribute to UK taxes on their global wealth, regardless of their original domicile.
Income and Gains: The 4-Year FIG Regime
For newcomers to the UK who have been non-resident for at least 10 consecutive tax years, a new 4-year Foreign Income and Gains (‘FIG’) regime will apply. During their first four years of UK tax residency, these individuals can claim full tax relief on FIG, meaning no UK tax is due on these amounts, even if remitted to the UK. This is a simpler and more generous alternative to the old remittance basis, which required meticulous tracking of offshore funds. However, eligibility hinges on that 10-year non-residency period, and personal allowances are forfeited during this time.
For existing non-doms or those ineligible for the FIG regime, the picture changes dramatically. From 6 April 2025 they will be taxed on their worldwide income and gains as they arise, aligning their treatment with UK-domiciled residents. Transitional reliefs, like the Temporary Repatriation Facility (‘TRF’), offer a chance to bring pre-2025 FIG into the UK at reduced rates (12% for the first two years, 15% in 2027/28), but post-2025, the full scope of UK tax applies.
Inheritance Tax: The Long-Term Resident Test
The most seismic change comes in IHT. From 6 April 2025, IHT will no longer hinge on domicile but on a “long-term resident” test. An individual is deemed a long-term resident if they have been UK tax resident for at least 10 out of the previous 20 tax years. Once this threshold is crossed, their worldwide assets -previously exempt for non-doms – fall within the UK IHT net, generally taxed at 40% above the nil-rate band (£325,000, or up to £1 million for couples with residence relief for a combined estate not exceeding £2.7m).
For those leaving the UK, a “tail” provision extends IHT liability on global assets post-departure. The tail length varies:
- 10-13 years of prior residency: 3-year tail.
- 14 years: 4-year tail, increasing by one year per additional year of residency, up to a maximum of 10 years after 20+ years of residency.
This contrasts sharply with the current 3-year tail for deemed domiciliaries, significantly extending exposure for long-term residents. However, transitional rules soften the blow for some: non-doms leaving before 6 April 2025, who weren’t deemed domiciled (i.e., resident for fewer than 15 of 20 years) escape the new tail, reverting to the old 3-year rule.
Trusts and Excluded Property
Trusts, a common tool for non-doms to shield assets, face upheaval. Currently, non-UK assets in trusts settled by non-doms (known as excluded property trusts) avoid IHT unless the settlor becomes deemed domiciled. From 6 April 2025, these assets will be subject to IHT – periodic 6% charges every 10 years and exit charges – if the settlor is a long-term resident at the time of a chargeable event (e.g., death or trust distributions). Trusts settled before this date by non-doms who weren’t deemed domiciled retain some protection, but only if the settlor’s residency status doesn’t trigger the new rules later.
This change eliminates a key planning advantage, pushing settlors and trustees to reassess structures before the deadline.
Winners and Losers
- Winners: UK-domiciled expats who’ve been non-resident for 10+ years can return for up to 10 years without IHT on foreign assets, gaining certainty over the vague domicile rules. New arrivals also benefit from the 4-year FIG window.
- Losers: Long-term non-dom residents (10+ years) face IHT on their worldwide estates and a prolonged tail if they leave. Trusts lose their excluded property status, increasing tax exposure.
Planning Opportunities before 6 April 2025
With just over a fortnight until the changes take effect, time is ticking. Here are strategies to consider:
- Leave the UK: Departing before 6 April 2025 could limit IHT exposure to the current 3-year tail for non-deemed domiciliaries, avoiding the longer 10-year tail. However, returning within 10 years could reactivate the new rules.
- Make Gifts: Transferring overseas assets before the deadline could sidestep IHT, as lifetime gifts don’t require the 7-year survival period for non-UK assets under current rules.
- Set Up Trusts: Non-doms not yet long-term residents could settle overseas assets into trusts before 6 April 2025, preserving excluded property status, provided they (and their spouse) aren’t beneficiaries.
- Use the TRF: For pre-2025 FIG, designating funds under the TRF at 12% (or 15% in 2027/28) offers a tax-efficient repatriation route.
Looking Ahead
These reforms reflect a push for equity – long-term UK residents, regardless of origin, will bear similar tax burdens. Yet, they also introduce complexity, especially around trusts and the tail provision. Consulting Trusted Tax Advice is essential to navigate this transition.
The clock is ticking toward 6 April 2025. For non-doms and those with global estates, being aware of their position and trying to establish proactive planning now (where permitted within the remaining timeframe) could mean the difference between a manageable tax bill and a hefty liability down the line.
