UK government to overhaul non-domicile tax status in favour of modernised system

At the recent March Budget the Chancellor announced that the government will scrap the non-domicile tax status in the UK and replace it will a more modern and simpler system.

Who does it affect?

 Non-domicile (non-dom) describes a UK resident whose permanent home or domicile for tax purposes is outside the UK. It refers to a person’s tax status, and has nothing to do with their nationality, citizenship or resident status, although it can be affected by these factors. A non-dom only pays UK tax on the money they earn in the UK. They do not have to pay tax to the UK government on money made elsewhere in the world unless they pay that money into a UK bank account. This means that non dom individuals can potentially accrue significant savings, if they choose a lower-tax country as their domicile, which is entirely legitimate.

How are the rules changing?

 The non-domicile system will be phased out as follows:

  • From April 2025, people who move to the UK will not have to pay tax on money they earn overseas for the first four years.
  • After the four year period, if they continue to live in the UK, they will pay the same tax as everyone else.
  • Those people who currently have nom-dom status will be allowed a two-year transition period, during which they will be encouraged to bring their foreign wealth into the UK system.

 Who will benefit from the changes?

 For existing non-doms who have been in the UK for more than 4 years the deferral of the introduction of the new regime is likely to reduce, or at least stagger, the number of people leaving the UK. There will however be a gradual decline in the number of former non-doms remaining in the UK. The new system will likely reduce the appeal of the UK compared to other countries.

The government has estimated tax receipts of £2.8bn by 2026/27 and £3.6bn by 2027/28 as a result of the change to the system which seems optimistic. However, the proposal that unremitted income and gains can be brought to the UK at a flat tax rate of 12% is sensible and will result in significant sums being brought to the UK for the benefit of the UK economy.

Feedback on the changes

 Four years is not a very long time to encourage foreigners to come and live and work in the UK. Many people coming to the UK would also want their children to be educated in the UK and would therefore want to be here for at least 8-10 years. Italy and Greece have regimes which last for 15 years and the equivalent regime in Switzerland is unlimited in time.

It is positive that the government recognises the complexities of the reliance on domicile as a connecting factor for inheritance tax and that it will consult with industry experts in advance of deciding on a new residence based regime. The government has also stated that non-doms can continue to establish excluded property trusts until 2025 which will reduce the number of non-doms who will leave the UK as a result of the proposed removal of the trust protections for income tax and capital gains tax.

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