The abolition of non-domicile in the Spring Budget

The abolition of non-domicile in the Spring Budget

It has suddenly become fashionable to “abolish res non-dom”. After the Labour party’s declarations that it would do so if it formed a government, the Conservatives have used their last budget to get ahead in the race and try to lay the ghost of domicile and taxation to rest.

As from 6 April 2025, there will be no more non-domicile and tax, (almost!) no more remittance basis. That means there is one last year of the remittance basis and RND regime. There will be no more remittance basis charges whether of £30,000 or £60,000, no more need for capital accounts and segregated income (going forward at any rate – pre-6 April 2025 funds would probably need to be ringfenced as they would still be taxed on a remittance). Double trust structures will be a thing of the past. We then transition into a completely new era. Banking, at least, should be considerably simpler.

What does this regime look like? As ever, one has to distinguish between income tax and capital gains tax (CGT) on the one hand and inheritance tax on the other. The government envisages somewhat different regimes for both.

Income tax and capital gains tax

The key words for the new income tax and CGT regime are “four years”. From 6 April 2025, a person arriving in the UK will enjoy a brave new world for the first four years of his residence. For the first four years, the UK would be perhaps the world’s greatest tax haven.

Such a person will not pay tax on his foreign investment income and gains arising in the first four tax years of residence. This looks to be an exemption from tax. This person could bring his foreign income and gains into the UK without consequence. Therefore there is some improvement over the existing system in that investment into the UK will be encouraged and not restricted.

Moreover, this person could have a UK domicile – because domicile will no longer matter for tax purposes. Therefore, on the face of it, returning Brits could literally come back to a warm welcome. This is quite a contrast to the harsh treatment handed out to that unfortunate class of returning former domiciliaries as recently as 2017.

However, if he were to remain resident into a fifth tax year, he would be subject to income tax and CGT on his worldwide income and gains. Accordingly, he would presumably contemplate ceasing residency at the end of the fourth year at the latest and find a more propitious base from which to enjoy the wealth he may well have garnered tax-free in the previous period.

It is disappointing that there is no incentive to keep the owners of wealth and businesses living in the UK beyond four years. Perhaps a future government will think fit to introduce a more internationally competitive regime (similar perhaps to the forfait regime in Switzerland or lump sum tax in Italy) and even introduce an investor visa to tempt such people to live here. As matters stand, many wealth owners will face a stark choice – leave; or stay and pay tax on a worldwide basis.

For those who have been resident in the UK before, they would have to be non-resident for 10 tax years before being able to return and enjoy the benefits of this four year tax paradise. Anyone who is presently sitting it out for six full tax years might want to extend that to 10.

Earned income

The government envisages that a simplified version of overseas workday relief will apply to the earned income of those who are in a grace period of three years. This must be because the present period is three and it is not thought right to extend it to four to fit in with the other new rules described above. This would presumably exempt their overseas earnings from tax altogether so they can spend these earnings in the UK. This only applies for income tax and not NICs.

Transitional provisions

Presumably in an effort to assuage the concerns of those who will suddenly be taxed on their worldwide income and gains, the government envisages some transitional provisions:

  • In the 2025/26 tax year, a person moving from the remittance basis to worldwide taxation will be assessed to 50% of the foreign income arising in that year. This will not apply to gains.
  • If such a person disposes of an asset which they held on 5 April 2019, they can elect to rebase the value to that date, thus eliminating the historic gain beforehand.
  • A former remittance basis user will be able to remit sheltered offshore income and gains in the first two tax years at a flat rate of 12%. This will be called the temporary repatriation facility. This might be attractive to some and increase the flow of investment into the UK.


Plainly the changes to the taxation of trusts will be (as ever) complicated and technical. The intricacies of stockpiled gains and the transfer of assets abroad rules will not be laid to one side, but rather postponed to be assessed on any beneficiary who has remained resident in the UK for more than four years.

The government holds out the promise that a person within this four year period will pay no tax on distributions from offshore trusts. This seems a complete panacea compared to the present situation and will surely open opportunities for beneficiaries of trusts to import themselves into the UK for a short period of time in which they can take distributions tax-free, before (presumably) exporting themselves elsewhere to a more propitious tax regime thereafter.

Moreover the government’s paper envisages that settlors as well as beneficiaries will enjoy a four year holiday from being assessed on the trust’s income and gains. This would be a major advantage for such short term settlors, albeit that if they remained resident into the fifth year, they would be taxed on the trust’s income and gains as if they owned the assets themselves. It is reminiscent of the glory days of not ordinarily residents who used to enjoy a not dissimilar advantage.

Deemed domiciled settlors/protected trusts

It is bad news, though, for deemed domiciled settlors of offshore trusts. The government will remove their protection from being taxed on the trusts’ income and gains. The settlors would then simply be taxed on their trust’s income and gains, albeit that those which arose before 6 April 2025 would be matched the value of a benefit. Therefore deemed domiciled settlors will need to review their affairs with care. Could they go non-resident? If not, is there a case to “onshore” the trust so that the trustees themselves become UK resident? In many cases, the application of the motive defences for income tax and CGT will be of paramount importance.

Hopefully the government will have to give some attention to mitigating tax charges from receiving a distribution from a trust to pay the tax which would now arise at once. If one extrapolates from experiences with the taxation of offshore income gains within protected trusts, the rules require the hapless settlor to pay tax on the gains and tax on the benefit of a distribution of funds to pay the gains. This “tax on tax” is hardly an incentive to remain exposed to the rules in the longer term.

Inheritance tax

Domicile will come out of inheritance tax which requires a massive rewrite of the Inheritance Tax Act 1984. Putting to one side the amount of parliamentary time to be consumed by this project – and one wonders if it could possibly be completed by the election – this will transform the basis of inheritance tax.

Instead of domicile, inheritance tax will be assessed by reference to residence. One can instantly see that a person is better to be non-resident for that reason. The government proposes that if a person has been resident in the UK for 10 years, he would be subject to inheritance tax on a worldwide basis. This has presumably been planned on the basis that he might be willing to pay worldwide tax on income and gains for years five to 10, but not inheritance tax on his assets after four years.

If such a person has been resident for 10 years or more, and leaves, he would remain within the inheritance tax net for a further 10 years. This represents a significant change to the present hang-over periods in relation to changes of domicile which tend to require only four years of non-residence or three calendar years depending on the circumstances. Presumably the advice to people who have more recently left the UK is simple – don’t come back.

As far as trusts are concerned, the government says that if a non-domiciled settlor settles non-UK situs assets into a trust before 6 April 2025, those assets will be excluded from inheritance tax thereafter. This might extend to assets settled within the favoured four tax year period albeit the technical paper is not clear on this point. This does suggest that if a person is going to remain UK resident, he might well set up a trust before that time to hold his non-UK assets. Somewhat counterintuitively the trust could (in theory) be UK resident whilst still protecting the assets from inheritance tax going forward.

It is not clear whether there would still be an opportunity for those who have not been resident for 10 years to take their non-UK situs assets outside the inheritance tax net by settling them into a trust. One would have thought such an opportunity would be desirable as otherwise the temptation to leave the UK before the 10th year of residency becomes all the more powerful.

The government also says that if the settlor has retained a benefit, such trust funds will still be outside the inheritance tax net – i.e. the excluded property rules will trump the gift with reservation of benefit rules as far as the settlor is concerned. This is a helpful confirmation of a point which is not entirely clear as a matter of legislation.


These are wide ranging and dramatic changes. If the experiences of 2008 and 2017 are anything to go by, the devil will be in the detail and depend on the final legislation. We are looking at a total overhaul of inheritance tax so it is hard not to envisage other much more subtle changes there.

Of course it is possible that these particular proposals may never be enshrined in legislation. This is particularly the case for inheritance tax which will be put out to consultation, using more time. However one assumes that even if the Conservatives lost power before enacting the proposals, the Labour party would implement them in, one supposes, at least a broadly similar form.

In overall terms though, the first four years of residency in the UK will afford the new resident what to all intents and purposes is a tax holiday on their offshore investment income and gains. It sounds like there will simply be no tax at all on overseas assets. Moreover, beneficiaries of offshore trusts can receive distributions during this period with no tax. Accordingly, the UK is likely to assert a particular pull on a class of persons who would otherwise pay tax in their country of present residence but can pay no tax by moving for a short period to the UK. Whilst the rules are generally unattractive for wealth and business owners given competing regimes in other countries, someone who moves to the UK with the good fortune to be a beneficiary of a trust created by a non-resident (or better still dead) settlor would have a favourable tax regime.

In the longer term, though, the imposition of worldwide taxation (and considerable complexity where a trust is involved) is likely to be off-putting and result in an increase of wealthy foreign residents leaving the UK. As noted, it is to be hoped that a future government finds a more pragmatic way to make it more tempting for wealth owners to remain in the UK, especially as the new proposals do remove the impediment of their bringing their money with them to spend here.

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