Abolition of the UK Non-Domicile tax regime was a long time coming

As had been widely predicted the Chancellor has ‘stolen Labour’s thunder” by announcing that the current remittance basis of taxation will be abolished for UK resident non-domiciled individuals.

In changing this regime there is a difficult balancing act between creating a more modern and fairer regime to encouraging high net worth individuals to come to the UK and preventing an exodus of the non-domiciles who are currently resident in the UK and from whom the UK economy benefits significantly.

The abolition of the non-dom regime in its current form has been a long time coming. The remittance basis was first introduced in 1799 by William Pitt the Younger, as a solution to the practical challenges of taxing income and profits arising many thousands of miles away in a world without email or electronic international bank transfers.

This vestige of an 18th century tax system has for many years given wealthy non-doms a strong incentive not to spend their wealth in the UK economy. The announcement by the Chancellor takes a step toward simplifying a system that has long driven unnecessary compliance costs and kept spending out of the UK.

From April 2025 foreign income and gains will be completely exempt from UK taxation for the first four years after being non-UK resident for at least ten years. Further, they will be able to bring these funds to the UK without taxation, a potentially significant advantage in these early years of UK residence compared to the current regime which disincentivises resident non-doms from remitting their foreign income and gains and spending them in the UK.

There will be no general amnesty for historical unremitted foreign income and gains, so individuals who have already claimed the remittance basis will continue to be incentivised to keep it out of the UK, although there will be a two-year window during which they can make remittances at a reduced tax rate of 12% which the government believes will encourage £15B of remittances.

The new four-year exemption announced this week falls short of the 15-year Italian equivalent which some had speculated would form the basis of the new UK regime, although the new regime still compares favourably to the Italian regime by not charging an equivalent of the Italian €100,000 annual fee.

The small print also confirms that the ‘loophole’ which currently effectively provides access to the remittance basis on an indefinite basis using offshore trust structures, will be removed from April 2025. Essentially, UK resident non-doms will pay income tax and capital gains tax on the same basis as UK domiciliaries after they have been resident in the UK for four years.

The reforms announced in the Spring Budget abolish the common law concept of domicile as a connecting factor for income tax, capital gains tax, and inheritance tax. This mirrors the 2013 replacement of common law residency with an objective statutory test. Before 2013, disputes over residency were a major driver of tax litigation, and the 2013 reforms successfully made residency more predictable, fairer, and vastly reduced the amount and complexity of disputes over residency. The same ought to be true of the reforms announced this week, with the new regime not dependant on a subjective test like domicile which lends itself so easily to disputes and litigation.

Under the new residence-based regime for inheritance tax, it is envisaged that the worldwide estates of non-doms will be brought into the scope of IHT once they have been resident in the UK for ten years, the longer period sensibly recognising the significance of IHT compared to other similar regimes worldwide and therefore its potential to make the UK unattractive as a destination for high net worth individuals. This is further emphasised by the intention to retain the inheritance tax status of trusts set up by non-doms for their overseas assets before the changes take effect in April 2025, following which those assets will continue to remain outside of the scope of UK IHT, potentially indefinitely.