New Inheritance Tax challenges ahead for non-doms

Starting next year, non-domiciled residents in the UK will encounter a more challenging tax environment as Labour seeks to reform outdated tax benefits and revamp Inheritance Tax (IHT) regulations.

Preceding the election, former Chancellor Jeremy Hunt announced in the Spring Budget that the UK would be abolishing non-dom status and incrementally discontinuing the remittance basis.

The new Government aims to reinforce these plans with a more “modern framework”.

In contrast to the Conservatives, Labour plans to forgo the transitional phase that was originally planned, which provided a 50 per cent tax reduction on foreign income for individuals transitioning from the remittance basis during the first year of the new policy.

Starting 6 April 2025, the new resident-based regime for Inheritance Tax (IHT) will come into effect, though full details on rebasing dates will only be available with the next Budget.

Resident-based regime

Under the new system, domicile will no longer determine IHT liability. Instead, it’s proposed that IHT will automatically apply to an individual’s global estate after they have been a UK tax resident for 10 years.

These changes will affect the range of property subject to UK IHT for both individuals and trusts. However, the new rules will not be applied retroactively, so estates of individuals who pass away before the effective date will remain unaffected.

Notably, there will be no further public consultation on these changes, as the Chancellor will take into account the responses from the previous Conservative non-dom consultation.

For new arrivals to the UK, a four-year foreign income and gains (FIG) regime will offer 100 per cent relief on FIG during their first four years of tax residence, provided they were not UK tax residents in any of the 10 years immediately before their arrival.

UK residents who are not eligible for the four-year FIG regime or choose not to use the relief will face capital gains tax (CGT) on their foreign gains.

What is a Temporary Repatriation Facility?

Income and gains within settlor-interested trust structures will no longer enjoy tax protection from April 2025.

To ease this transition, a new Temporary Repatriation Facility (TRF) will be available for individuals previously taxed on the remittance basis.

This means that if you’ve used a remittance basis before, you can still bring back foreign income and gains earned before 6 April 2025 and enjoy a reduced tax rate for a limited time after the remittance basis ends.

The specifics of the rate and duration for this facility are being designed to be as beneficial and appealing as possible.

Upcoming developments

More details on the regime will be announced in due time. The first Labour Budget of this parliament is scheduled for 30 October 2024, where their plans should be confirmed, and further details of their policies provided.

If you have any questions, please contact our team.