UK Budget 2024: abolition of non-dom tax regime ‘a radical change’

The beneficial tax regime will be replaced with a simpler residence-based regime, which will take effect from 6 April 2025. Individuals coming to the UK who opt into the regime will not pay UK tax on foreign income and gains for the first four years of tax residence.

Existing non-domiciled UK tax resident individuals who have been UK tax resident for less than four years will be eligible to opt into the new scheme and will benefit from relief until the end of their fourth year of tax residence. However, under the new system, regardless of where an individual is domiciled, anyone who has been tax resident in the UK for more than four years will pay UK tax on any newly arising foreign income and gains, as is the case for all other UK tax residents.

Sophie Warren, a tax expert at Pinsent Masons, said: “Even with what little we know about the new residence-based regime, it’s already shaping up to be remarkably radical. A lot of people who are currently non-doms are going to see 50% of their overseas income subject to UK tax as soon as April 2025. That is going to surprise many non-doms who were probably hoping for a more gradual transition.”

According to a Treasury policy paper, the reforms are being introduced to “modernise and simplify” the tax system for individuals. The government intends to publish a consultation on the new scheme followed by draft legislation later this year, and has said it will ensure that the scheme is internationally competitive and attracts the best international talent.

However, Warren said: “The upcoming consultation on implementing the new system needs to make sure the steps the government is taking are not too much, too soon. There’s a risk of chasing people who have been non-doms out of the country if the implementation is too aggressive.”

“We’re likely to see a lot of non-doms getting income and capital into the UK over the next three years to make sure they benefit from the temporary 12% tax rate on doing so. If they don’t, they will end up paying the full UK tax rate on it – that’s up to 45% on some of their income,” she said.

Funds tax expert Hatice Ismail of Pinsent Masons said: “The loss of the remittance basis tax regime for non-UK domiciled individuals is likely to lead to an uptick in demand by affected individuals for their shares in ‘offshore funds’ to be elected to have ‘reporting fund’ status, as otherwise gains they make from the disposal of their fund shares could potentially go from 0% to up to 45% instead of up to 20%. The change may also encourage non-UK domiciled individuals to invest in UK funds rather than offshore funds in future.”

The government has also confirmed that overseas workday relief (OWR) will be reformed, with eligibility for the relief based on the new regime. OWR will continue to provide income tax relief on earnings from duties undertaken overseas for the first three years of UK tax residence, with restrictions on remitting these earnings removed.

The government will also consult on introducing changes to inheritance tax (IHT) so that it is based on the new residence-based regime. To provide certainty for affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change – these assets will not fall within the scope of the UK IHT regime.

Currently, liability to IHT depends on domicile status and the location of the assets. Under the current regime, no IHT is payable on non-UK assets of non-domiciled taxpayers until they have been UK resident for 15 out of the past 20 tax years.