Changes to the taxation of resident but non-domiciled taxpayers

The standout change from the October 2024 Budget is that the concept of domicile, and with it that of deemed domicile, is being removed from the tax system.  It’s being replaced by residence as a connecting factor, along with the concept of a long-term resident (LTR). The associated changes have substantial consequences both for residents’ lifetime tax liabilities, as well as on death.  The changes are due to come into effect in April 2025 although there will be consultations on certain aspects.

UK resident taxpayers will no longer be able to claim the remittance basis of tax (although there will be a temporary repatriation facility, which allows previous remittance basis users to designate amounts that arose prior to April 2025 and pay a reduced amount of tax on those remitted sums for three years).

For non-residents planning to come to the UK, it will be possible to opt-in to a new four-year foreign income and gains (FIG) regime.  This gives 100% relief on remitted gains (meaning no tax is paid on those sums being brought to the UK), provided the taxpayer has not been UK tax resident in the ten years immediately before their arrival.  The FIG will need to be claimed through self-assessment and, if claimed, the claimant will lose their personal allowance for income tax and the annual allowance for capital gains tax.  After four years, the foreign resident will be deemed UK resident and taxed on their worldwide income and gains on an arising basis.

Capital gains tax

Certain taxpayers who have previously claimed the remittance basis, and who are not UK domiciled or deemed domiciled, can elect to “rebase” offshore assets (which they hold personally) to their value as at 5 April 2017.  This is subject to detailed conditions.

Inheritance Tax

UK assets have always been within the scope of inheritance tax (IHT), but until now liability to IHT in respect of overseas assets has been determined by domicile, or deemed domicile.  This is being replaced by the concept of the LTR.  If a taxpayer has been resident in the UK for at least ten out of the last twenty tax years immediately preceding the tax year in which a chargeable event, including death, arises, they will be an LTR.   Residence for these purposes is based on the Statutory Residence Test (SRT) for the years from 2013.  For the years before, the pre-SRT rules will apply.  It is worth noting split years in accordance with the SRT will count as a full year for IHT. The one silver lining here is for long-term expats: their overseas assets will now be outside the scope of UK IHT more easily, and even when they return to the UK they appear to be able to benefit from the exemption until they become LTRs.

Once the ten-year mark has passed, the LTR’s worldwide assets will be subject to UK IHT (subject to any double taxation arrangements with other countries where someone has assets or is also deemed resident).  Previously, this regime would only generally apply after 15 years of residence.

The period that an LTR remains within the scope of IHT after becoming non-resident depends on the length of time they were resident in the UK before becoming non-resident.  The longer an individual has been resident, the longer the IHT “tail”.  Taxpayers resident for between 10 and 13 tax years will remain within the scope of IHT for 3 years after becoming non-resident.  Thereafter, the time period increases by a year for each year of additional residence.  So an LTR with 14 years of residence would remain within the scope of UK IHT on their worldwide estate for 4 years.  The maximum tail is 10 years, and there is some relief that this hasn’t been applied across the board.

After 10 consecutive years of non-residence, the residence test is effectively reset, and an individual will again become an LTR after another 10 years of residence in the UK.

There have also been changes in relation to the impact of IHT domicile elections.  Generally, transfers from a UK domiciled spouse to a non-domiciled spouse have a limited IHT exemption of £325,000.  Since 2013 it has been possible for the surviving non-domiciled spouse or civil partner to elect to be UK domiciled for IHT.  This removes the limitation on the spouse exemption, and provides full IHT relief on transfers.   After a period of four years of non-residence, generally including the year of the election if the spouse is non-resident, they would lose their UK domicile status.  The risk to the non-domiciled spouse was principally that should they die during the period of being UK domiciled, their worldwide estate would be subject to IHT.

The new rules from 6 April 2025 amend the time that a spouse or civil partner will remain within the IHT net after making an election to 10 years.  This is a significantly longer period and will need to be carefully considered in each case.

There has been a lot of speculation about how Double Tax Conventions (DTCs) will work as they all refer to the concept of domicile.  There is no way to unilaterally alter a DTC and many were negotiated decades ago.  There was real concern, to those who rely on DTC’s to avoid a double tax charge, whether a DTC may no longer be able to be relied on.  The policy paper confirms all DTCs remain effective in the same way as under the previous rules.

Offshore trusts

Offshore trust structures have often featured for international families as part of their wider estate planning.  The structures could provide protection in some circumstances against UK taxes including IHT.  After April 2025, the question as to whether overseas assets held in a trust are subject to IHT will be linked to the tax status of the settlor:  if the settlor is an LTR at the time of the relevant IHT event, including on their death, those assets will be subject to IHT.

That means that the status of the assets in the trust can change, as the tax position of the settlor changes, although the assets will always need to be located outside the UK to have a chance of being excluded from an IHT charge.

There will be transitional arrangements for assets held in trusts set up prior to Budget Day.  Where assets are currently outside the scope of IHT, those assets will remain outside the scope of IHT on the settlor’s death even if the settlor becomes an LTR before their death.  That doesn’t apply to all IHT charges though:  10 yearly and exit charges will apply once the settlor is an LTR.

The future of domicile

Domicile hasn’t disappeared completely, only in tax terms.  Whilst the new reforms will move us to a much more factual residence based approach to tax, domicile will still be important for succession purposes generally – for example it will still need to be considered to establish the essential validity of a Will, which jurisdictional laws the succession of assets will follow and whether a claim can be made under the Inheritance Tax Provision for Financial Dependents Act 1975.

If you have any questions about the topics raised in this article, please get in touch.