A new era for non-domiciled individuals: understanding the Spring Budget tax reforms

In a significant move, Chancellor Jeremy Hunt has announced a major shift in the tax treatment of non-domiciled individuals (non-doms) in the UK. This change is set to redefine the tax landscape for those living in the UK but domiciled elsewhere.

The current tax landscape for non-doms

Presently, non-doms have two taxation options:

They can choose the remittance basis, paying UK taxes only on foreign income and gains remitted to the UK, with no tax on foreign income and gains retained abroad. However, once a non-dom has been a UK resident for seven of the previous nine years, a Remittance Basis Charge (RBC) of £30,000 applies. This charge increases to £60,000 for those resident for 12 of the previous 14 years.

Alternatively, non-doms can opt for the arising basis, paying tax on their worldwide income and gains, irrespective of whether the money enters the UK. Non-doms would usually choose this option if it is more cost-effective than paying the RBCs.

A new tax regime

The Spring Budget 2024 marked a turning point for non-doms. In his speech on 6 March, the Chancellor announced the abolition of the current non-dom system, to be replaced by a simpler, residency-based system from April 2025.

Under the new regime, new UK residents will retain non-dom status for the first four years of their residency. After this period, they will become domiciled and subject to UK taxes on their worldwide income. This four-year rule applies only if the individual can show a consecutive 10-year period as a non-UK resident prior to their arrival.

Transitioning to a new normal

For existing non-doms, a transition period will facilitate the shift to the new scheme. Non-doms not qualifying for the new regime will pay tax on 50% of their foreign income for that year, excluding profits from the sale of foreign assets.

Owners of foreign assets can adjust the base value of these assets to their market value as of 5 April 2019 for sales after 6 April 2025, meaning tax is due only on any value increase from that date.

To incentivise the transfer of overseas wealth to the UK, a temporary repatriation facility will allow current non-doms to bring pre-April 2025 foreign income and gains into the UK at a reduced tax rate of 12% for 2025/26 and 2026/27.

Changes to the Overseas Workday Relief (OWR)

The OWR currently offers a tax advantage for non-doms working in the UK, allowing them to claim income tax relief on earnings related to overseas duties. From April 2025, the OWR will be significantly simplified, introducing a four-year scheme for eligible individuals.

This change aims to attract international talent to the UK by offering simpler tax relief opportunities. Eligible individuals will benefit from income tax relief on the portion of their salary related to overseas duties during their first three years of UK residency. Furthermore, existing barriers to repatriating these earnings to the UK will be removed, increasing the appeal of the OWR scheme to overseas professionals.

How should you react to the changes?

If you are currently classified as a non-dom in the UK, the recent changes in tax legislation will necessitate a re-evaluation of your tax strategies.

For those wishing to remain in the UK, it is crucial to determine your eligibility for any available transitional schemes and understand the full implications of the new tax laws. This includes assessing whether you will be required to pay full UK taxes once the legislation comes into effect.

The new tax landscape may also require you to adjust your current financial structure and plan for future liabilities. This involves several key steps:

Diversifying your income: It is advisable to contemplate the diversification of your income sources to mitigate your overall tax liability under the revised regime. One potential course of action is to augment the percentage of revenue obtained from sources within the United Kingdom or investments exempt from taxation.

Reassessing your residency status: It may be prudent for certain individuals to reconsider their residency status in the United Kingdom. Not only does this decision affect your tax situation, but it also has significant ramifications for your personal and professional spheres.

Restructuring and assessing your investments: Under the new regulations, examine your investment portfolio to identify opportunities for tax-efficient structuring.

Examining gifting and inheritance tax planning: In order to reduce possible tax obligations, you should assess your gifting and inheritance planning strategies. There may be tax benefits associated with transferring assets to non-domiciled spouses or successors under the current regulations.

Invest in assets based in the United Kingdom: The alterations may serve as a catalyst to reevaluate your investment strategy. By reallocating funds to assets or expanding a business based in the United Kingdom, you may be able to take advantage of specific tax incentives and reliefs that are in line with the new tax regime. Notably, during his Spring Budget speech, the Chancellor announced the inclusion of the British ISA, which could enable you to invest £5,000 tax-free in British companies.

The new tax rules for non-doms in the UK necessitate a comprehensive review of your current tax strategies. By taking proactive steps now, you can ensure that you are well-prepared for the changes ahead. However, we also suggest you speak to a qualified and experienced tax advisor, such as our own team of tax experts. To discuss the implications of this change in taxation laws with them, just call JW Hinks on 0121 456 0190.