As the UK government prepares to implement new amendments to its tax system, focus has been drawn to the new 10-year non-dom rule, set to take effect in April 2025. From April 6th the current remittance basis rules will be abolished, transitioning to a new system based on tax residence. This shift aims to close the loopholes that have allowed non-doms to benefit from favorable tax treatment for years.
Under the new rules, non-domiciled individuals living in the UK will face inheritance tax on their worldwide assets after a decade of residency. The Chancellor, Rachel Reeves, highlighted the need for a fair tax system, stating that the changes will ensure that everyone who calls the UK home pays their fair share of taxes. This move is part of a broader strategy to ensure fiscal equity and accountability among all residents.
Foreign Income Taxation and International Talent Attraction
One of the key features of the 10-year non dom rule is the introduction of a four-year relief period for foreign income and gains (FIG) for new arrivals. During this initial period, individuals will enjoy 100% relief from taxation on their foreign income and gains, provided they have not been UK residents for any part of the previous ten years. This structure aims to attract international talent while also establishing a clear tax residency framework.
However, the new residence-based system has faced criticism from various commentators who argue for a revised non-dom system that effectively addresses the needs of internationally mobile individuals. Currently, of the estimated 83,800 non-domiciled residents in the UK, only about 14,800 are expected to benefit from the four-year FIG regime. This means that approximately 9,300 individuals may find themselves liable for tax on all foreign income and gains after the deadline, a significant change from their current tax situation.
The Treasury asserts that these changes will streamline the tax experience for non-domiciled PAYE employees, eliminating the need to keep part of their employment income offshore to receive tax relief. However, experts like Steven Porter from Pinsent Masons caution that the government must ensure these reforms do not drive valuable non-dom residents away from the UK.
Concerns Over Non-Dom Exodus
The 10-year non dom rule will also impact anyone who does not qualify for the Foreign Income Gains (FIG) exemption, mandating that they pay tax on their foreign income and gains. The removal of the 50% discount on foreign income is slated for this same date, alongside the introduction of inheritance tax (IHT) on non-domiciled individuals who have resided in the UK for ten years or more.
Tax experts, including Will Johnstone, tax director at MHA, have voiced concerns about the potential mass exodus of non-doms from the UK before the April 2025 deadline. Johnstone highlights that the new regulations will apply not just during a taxpayer’s UK residency but will extend to worldwide assets for ten years after their departure. This means that non-doms have a limited window of opportunity to establish non-UK residency and avoid being subject to the new 10-year tail for inheritance tax.
Urgent Departure: Inheritance Tax for Elderly Non-Doms in the UK
For many elderly non-doms, the urgency to leave the UK within the next five months has never been more pressing. Delaying their departure by even a year could extend their UK inheritance tax exposure by an additional seven years, creating a significant financial incentive to act quickly.
Comparatively, the situation echoes a similar tax system introduced in Japan in 2018, which was abandoned just a year later due to public backlash. Tax partner Mathew Sperry from Katten Muchin Rosenman points out that the Labour Party’s adoption of these tax proposals shows a lack of consideration for the consequences, including the absence of grandfathering provisions for trusts that were previously IHT protected.
Projected Impact of New Tax Regulations on HMRC Revenue and Compliance Costs
While the changes are expected to cost HMRC around £30 million to implement—covering updates to IT systems and hiring additional staff for compliance—the projected revenue increase is substantial. The government anticipates raising an additional £5-6 billion in tax per year, contingent on the responses of a highly mobile group of high-net-worth individuals.
Over the past five years, non-doms have contributed approximately £57.5 billion in taxes. However, under the new rules, this contribution is only expected to rise by £4.2 billion by the 2026/27 tax year, eventually reaching £6 billion the following year.
As discussions surrounding the 10-year non-dom rule continue, it is essential for affected individuals to weigh their options carefully. The financial implications of these changes could be significant, and seeking expert tax advice has never been more critical for those navigating this evolving landscape. To book a free consultation anywhere in the UK, contact our team of tax specialists today.
