The UK government’s latest budget announcement introduced a significant overhaul to the non-dom tax regime, which could end the favourable tax treatment of foreign income and capital gains for non-domiciled residents, says Mauro De Santis Bo, Partner of GSB Wealth.
Who are non-doms?
Non-domiciled residents, or ‘non-doms’, are individuals who reside in the UK but do not consider it their permanent home. Under the existing rules, non-doms are privileged to keep their foreign income and capital gains exempt from UK taxes, provided they have not resided in the UK for more than 15 consecutive years and do not intend to establish permanent residency.
Historically, many expats have been able to take advantage of this arrangement, residing in the UK for extended periods while on international assignments or while their children complete their education. However, if the Conservative Party enacts reforms to the non-dom status, it would mean:
• The complete removal of non-dom status and its associated tax advantages.
• A four-year tax exemption for individuals during their first four years of UK residence applies to current and new arrivals.
• This exemption also extends to UK-domiciled individuals returning after a break of at least 10 years.
• The proposed changes also include modifications in how trusts and inheritance taxes are handled. This could have significant implications for individuals with trusts set up by UK resident non-doms, as these would no longer offer shelter from income and capital gains taxes.
Future implications for expats
If these changes take effect on 6 April 2025, they could significantly impact expats currently claiming non-dom status and those planning to move to the UK seeking the same status.
The new regime would eliminate the 15-year window during which non-doms could benefit from tax-free income and gains on their foreign assets.
Those who have recently arrived might still enjoy part of a four-year transition period to decide whether to bring their assets into the UK or keep them abroad.
Afterward, they will be subject to standard UK tax laws.
Changes in trusts and planning for future relocations
Trusts set up by UK resident non-doms would also no longer offer shelter from income and capital gains taxes.
For expats contemplating a move to the UK with the intent to become non-doms, the revised rules would make this option less appealing, shortening the beneficial tax period from a possible 15 years to just four.
After this period, they would need to pay taxes on their foreign assets.
Attractive tax exemptions for permanent relocators
However, the proposed four-year tax exemption is highly attractive for expats planning to relocate to the UK permanently and thus ineligible for non-dom benefits.
This period would be free from charges or minimum tax amounts, meaning they would not be taxed on non-UK income and capital gains, including distributions from non-UK trusts, regardless of whether the funds are brought into the UK.
Considering other residency options
Choosing a place to live globally isn’t solely based on tax considerations. Cultural compatibility, historical ties, and proximity to family abroad also play significant roles.
Therefore, the change in non-dom status may not severely impact most expats already in or planning to move to the UK unless they possess considerable wealth.
Those still interested in longer-term non-dom tax benefits might consider relocating to countries like Greece or Italy.
These offer non-dom status with associated tax benefits for an initial investment of €100,000 to €500,000.
Conclusion
Given the proposals are still tentative, there remains uncertainty about the final details of the legislation. Implementing these changes hinges on the outcome of the upcoming election, with the Labour Party currently leading in the polls and indicating a desire to eliminate non-dom status.
For now, it’s too early to start planning a response to these potential tax changes unless a move from the UK is already decided.
More clarity will emerge as further details are released, at which point those affected can begin to consider tax mitigation strategies to adapt to the new tax landscape.
By Mauro De Santis Bo, Partner of GSB Wealth
