What will the Labour Government mean for non-domiciled individuals?

Now that Labour has come to power how is this likely to affect the non-domiciled individuals (non-doms)?

The previous regime

Under the previous regime, non-doms could elect to be subject to the remittance basis of taxation. This meant that they would be subject to UK tax on UK income and gains as they arise but only pay UK tax on foreign income and gains if and when they were remitted to the UK. A remittance basis charge was also payable after seven years of residency.¹ When a non-dom was resident for 15 out of the previous 20 tax years, they became deemed domiciled, and were subject to UK tax on their worldwide assets on an arising basis.

The proposed regime and the future under Labour

Income tax and capital gains tax

Under the proposed residence-based regime, non-doms will be able to bring their foreign income and gains into the UK free of tax for the first four tax years of their residency (which is being referred to as the foreign income and gains regime (FIG regime))². Once an individual has been resident in the UK for at least four tax years then they will be liable to pay UK tax on their worldwide assets. Only those who have been non-resident in the UK for a period of ten tax years or more will be able to access the FIG regime. However, the former government's technical note suggests that those who have been resident for less than four tax years directly prior to 6 April 2025 will be able to claim the FIG regime from 6 April 2025 for the remaining years of the four-year residency period. Those who do not qualify for the new FIG regime will pay UK tax on their foreign income and gains that arise after 6 April 2025.

While the headline is a stark change from the previous regime, under the proposed FIG regime, there is still room for efficient tax planning through the transitional rules. For the first tax year of the FIG regime, non-doms who are currently subject to the remittance basis of taxation, and who do not qualify for the FIG regime, will only pay income tax on an arising basis on 50% of their foreign income. Labour have said that they will scrap this proposal which will supposedly bring in an extra £600m in revenue for the treasury.³

For non-doms who have accumulated their foreign income and gains abroad prior to 6 April 2025, there will be a temporary repatriation facility which will enable those previously taxed on a remittance basis to pay a reduced flat rate of 12% on remittances of pre-6 April 2025 foreign income and gains for the 2025-26 and 2026-27 tax years. These provisions encourage increased investment in the UK from non-doms and aim at persuading the majority of non-doms already resident here to buy in to the proposed regime. It has been suggested that Labour will support the bulk of the proposed regime and will also allow non-doms to repatriate their stockpiled income and gains in some form, although the party have not yet provided any further detail on their plans.⁴

Inheritance tax

The proposed regime also significantly tightens the provisions for inheritance tax moving it from a domicile-based system to a residence-based system. Under the previous regime, non-doms would only pay inheritance tax if they became deemed domiciled. The former government suggested that from 6 April 2025, non-doms' foreign assets would be subject to UK inheritance tax if they have been resident in the UK for 10 years or more; however, a timeline for implementation had not been set out prior to the election, with the new rules subject to a consultation, so there is currently uncertainty as to whether this will be a priority for Labour.

Labour have not yet confirmed any plans to change the main provisions for inheritance tax, but they have indicated that they will remove the inheritance tax protections for offshore trusts by ensuring that all foreign assets held in an offshore trust will fall within the scope of UK inheritance tax.⁵ Currently, non-UK assets settled into a trust by a non-dom settlor (an excluded property trust) are not subject to UK inheritance tax. This may change under the new government as they have not indicated that grandfathering will apply to excluded property trusts set up before 6 April 2025 and therefore these trusts may become subject to UK inheritance tax charges.⁶ Current non-doms with offshore trust structures already in place will require careful planning to decide whether to wind up these structures to possibly prevent large inheritance tax charges.

_{1. Important changes for non-domiciled private clients - Spring Budget 2024}

_{2. Technical note: Changes to the taxation of non-UK domiciled individuals - GOV.UK  - used for all information about the proposed residence-based regime}

_{3. Change Labour Party Manifesto 2024, p127}

_{4. Labour set out plans to reduce tax gap and close non-dom ‘loopholes’ (Chartered Institute of Taxation, 17 April 2024); Non-domicile taxation reforms | Practical Law (thomsonreuters.com)}

_{5. Change Labour Party Manifesto 2024, p 21}

_{6. Offshore trusts: inheritance tax | Practical Law (thomsonreuters.com)}

For further information about the upcoming non-domicile changes, please contact our Private Client team on 020 7665 0904, or complete the form below.