As the UK tax landscape evolves, substantial changes to the non-domicile (non-Dom) regime will take effect on 6 April 2025. While these updates are primarily aimed at non-domiciled individuals, their implications will also significantly affect UK-domiciled individuals, especially those with a domicile of origin or who were previously domiciled in the UK. It is essential for all clients to understand these changes and review their financial arrangements accordingly.

Current Rules

Under the existing non-Dom rules, individuals classified as UK domiciled or deemed domiciled are subject to Inheritance Tax (IHT) on their worldwide assets. Domicile, a complex legal concept, means that a person born in the UK inherits a domicile of origin. This status can only be changed if an individual establishes a permanent home abroad and severs all ties with the UK.

Deemed domicile applies to those who have been UK residents for at least 15 of the last 20 tax years. If they leave the UK, they remain liable for IHT on their global assets for three years afterward. Conversely, non-UK domiciled individuals are only liable for IHT on their UK assets.

New Rules from 6 April 2025

Inheritance Tax (IHT)

From 6 April 2025, the criteria for determining IHT liability will transition from a domicile-based system to a residence-based system. Under the new framework, domicile status will no longer impact an individual’s exposure to UK tax. Instead, the primary consideration will be whether an individual has been a UK tax resident for at least 10 out of the last 20 tax years.

• Long-Term Residents (LTR): If an individual meets this residency test, they will be designated as a Long-Term Resident and will incur IHT on their worldwide assets.
• Non-Long Term Residents (non-LTR): Individuals who do not meet the residency requirement will only be liable for IHT on their UK sited assets.

Foreign Income and Gains (FIG) Rules

Additionally, for those relocating to the UK after being non-UK tax residents for ten consecutive tax years, the FIG regime will offer advantages during their first four tax years of UK residence. Under this regime, individuals can exclude overseas income and gains from UK tax, including earnings for non-UK workdays associated with UK employment. Notably, this FIG regime is accessible to anyone who meets the residence criteria, regardless of their domicile status.

Considerations: Winners and Losers

The forthcoming changes will create a varied landscape of outcomes for clients:

• Re-evaluating Existing Structures: Individuals who have established structures such as excluded property trusts and IHT trusts may find it necessary to reassess these arrangements to ensure they remain effective under the new regime.
• Opportunities for Expats: The changes are especially beneficial for expatriates planning to stay offshore long-term; in the case of non-LTRs, they can make gifts without the seven-year IHT survival rule applying and can freely settle assets into discretionary trusts, with non-UK assets protected from IHT.
• FIG Regime Advantages: Those who qualify for the FIG regime will benefit significantly, especially if they have substantial foreign assets.
• Challenges for Recent Returnees: Clients who have returned to the UK and are near or have surpassed the 10-year residency mark may face increased tax burdens. However, those individuals are encouraged to ensure they have implemented tax-efficient structures beforehand.

Summary

As we approach these significant reforms, it is clear that the changes to the UK non-Dom regime will have wide-reaching effects. UK domiciled individuals and former Domiciliaries should also take heed, as these updates may influence their financial positions. We strongly recommend that all clients review their individual circumstances with us promptly to identify potential actions to mitigate negative impacts or capitalise on opportunities arising under the new tax regime.

Understanding and proactively adjusting financial arrangements will be essential for successfully navigating this evolving landscape.

Author:
Giles Henman Chartered FCSI, Senior Partner & Head of Business, Asia, Eight Wealth International
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