On 6 March 2024, Chancellor Jeremy Hunt announced transformative changes to the taxation system for non-UK domiciled individuals, commonly known as ‘non-doms’. The government’s decision to replace the existing ‘non-dom’ tax regime with a new residence-based system starting April 2025 marks a significant shift with a stated aim of creating a fairer tax landscape. This reform intends to treat new UK arrivals similarly to long-term residents after four years, levelling the playing field, while maintaining the UK’s appeal to global investors. The long term impact of these changes on the attractiveness of the UK remains to be seen.
Key Changes and Their Impacts
The new system, scheduled for implementation from 6 April 2025, will abolish the remittance basis of taxation. Instead, it introduces the Foreign Income and Gains (FIG) regime, under which non-doms can elect not to be taxed on their foreign income or gains for the first four years of their UK residency. This approach will simplify the tax system and encourage the inflow of international capital by removing disincentives that previously discouraged the repatriation of overseas income.
Full details of how the changes will be implemented and draft legislation are still awaited but it is clear that, for trustees, the reforms pose both opportunities and challenges. The abolition of the ‘protected settlements’ status under the Finance (No.2) Act 2017 means that income and gains arising to trustees from a settlor-interested trust will now be taxed in the hands of UK resident settlors who are ineligible for the FIG regime. This significant change could affect the strategic use of offshore trusts, potentially increasing the tax liability for trustees managing these structures. While the Budget announcement suggested that the Inheritance Tax Excluded Property status of trusts created before 6 April 2025 will be protected, announcements by the Shadow Chancellor suggest a Labour government would not honour this.
Opportunity or Threat for Trustees?
While the new system simplifies some aspects of taxation for non-doms, it also complicates trust management and inheritance planning. Trustees must now navigate the removal of benefits previously afforded under the protected settlements regime and adjust to the new tax realities. However, this also presents an opportunity to reevaluate and potentially restructure trust arrangements to align with the new rules, optimising tax efficiency, where possible, under the revised regime.
Expert Commentary
Karen Methold, Partner and Head of Wealth Planning at Rooks Rider Solicitors, emphasises the importance of a proactive response to these changes. “The shift from a domicile-based to a residence-based tax system represents a critical turning point. It’s imperative for trustees and non-doms to understand the nuances of these changes and act swiftly to realign their financial and estate planning strategies accordingly,” she advises.
Karen further notes that while the new regime could introduce complexities, it also opens doors for more straightforward and transparent wealth management practices. “This could be a double-edged sword for trustees. On one hand, the increased transparency and fairness could attract more foreign investment to the UK. On the other hand, the adaptation to new rules will require meticulous planning and possibly restructuring of existing trusts,” Karen adds.
Conclusion
The proposed reforms to the non-dom regime are poised to reshape the landscape of tax planning in the UK. As these changes usher in a new era of taxation for non-UK domiciled individuals, it is crucial for affected parties, particularly trustees, to stay informed and seek expert advice. Rooks Rider Solicitors remains dedicated to assisting Clients through this transitional period, ensuring that the opportunities outweigh the threats in the evolving regulatory environment.
For further details on how these changes might affect your personal or business tax situation, or to discuss your specific circumstances, please contact Karen Methold or a member of our Wealth Planning team at Rooks Rider Solicitors.
Karen Methold will be participating in a STEP Isle of Man committee special event ahead of the PCD IOM dinner on 14 May at Comis Hotel. Together with industry peers, Karen will take part in a Panel Session discussing whether “The RND Changes are an opportunity or a threat for Trustees?” This event will provide further insights and a platform for discussing the impacts of these significant changes.
