UK Government Announces Overhaul of Non-Dom Tax Regime

In a bid to foster a fair and globally competitive tax environment, the UK government has unveiled plans to modernize its tax system, particularly aimed at non-domiciled individuals (non-doms). The overarching goal is to attract talented individuals and investments that will contribute significantly to the nation’s economic growth while ensuring that those who benefit from the UK’s public services make a fair contribution.

The current system, which grants preferential tax treatment to non-doms based on their domicile status, is deemed outdated and encourages the retention of income and gains offshore. As part of the reform, the government will phase out the existing rules for non-doms, effective from April 2025, and introduce a new residence-based tax regime.

Under the new system, individuals relocating to the UK will enjoy 100% tax relief on foreign income and gains for the initial four years of their residency, providing an incentive for international talent to choose the UK as their base. Additionally, transitional arrangements will be in place for current non-doms, ensuring a smooth transition to the revamped tax structure.

A pivotal aspect of the reform is the removal of preferential tax treatment based on domicile status. From April 2025 onwards, all new foreign income and gains will be subject to UK taxation, eliminating the remittance basis of taxation for non-doms. This move towards a simpler and fairer taxation system aims to align the treatment of non-doms with that of other UK residents.

Furthermore, the reform introduces a four-year tax relief period for existing non-doms who have been UK tax residents for fewer than four years. During this period, they will be exempt from UK taxation on foreign income and gains, incentivizing them to bring funds into the UK for spending and investment purposes.

Overseas Workday Relief (OWR), which currently applies during the first three years of UK tax residency for non-doms taxed on the remittance basis, will be retained and simplified under the new system, further enhancing the attractiveness of the UK as a destination for international talent.

In terms of inheritance tax (IHT), the government plans to transition to a residence-based regime, with consultations underway to ensure a smooth implementation. Existing arrangements will remain unchanged for non-UK assets settled into trusts by non-UK domiciled individuals prior to April 2025.

Recognizing the significant impact of these reforms on existing non-doms, the government has introduced targeted transitional arrangements. These include a temporary reduction in foreign income subject to tax, re-basing of capital assets, and a Temporary Repatriation Facility to facilitate the transfer of foreign income and gains to the UK at a reduced tax rate.

While protections on non-resident trusts will be removed for new foreign income and gains after April 2025, existing trusts will remain unaffected unless distributions or benefits are provided to UK residents with more than four years of residency.

Overall, the overhaul of the non-dom tax regime represents a decisive step towards creating a fairer and more competitive tax environment in the UK, aligning with the government’s vision of fostering economic growth while ensuring equitable contributions from all residents.

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