What the UK’s new non-dom changes mean for you

Reeves also announced the removal of the non-dom tax scheme which will impact UK residents and expats alike, replacing the domicile-based tax system with a new residence-based framework.

Here's a breakdown of the main changes and what they mean:

• Four-year Foreign Income and Gains (FIG) Regime: Starting 6 April 2025, UK residents will pay tax on all income and gains. However, a new FIG regime will exempt foreign income and gains for the first four years of residence after 10 years of non-residence, available to both UK-domiciled and non-domiciled individuals.
• Inheritance Tax (IHT) shifts to residence-based rules: The IHT system will switch from a domicile-based to a residence-based system.
• Temporary Repatriation Facility (TRF): To encourage returning funds to the UK, a TRF will allow those previously taxed under the remittance basis to remit funds to the UK for a period of three years from 2025-2026 at a reduced tax rate of 12%, rising to 15% in 2027-2028.
• Capital Gains Tax (CGT): For past and current remittance-based taxpayers, capital gains on foreign assets held as of 5 April 2017, can be rebated under specific conditions, providing relief on historic foreign assets.
• New tax rules for foreign trusts: Income, gains and inheritance tax for foreign trusts will now be assessed differently.

Not all foreign income and gains are exempt from taxation under FIG, with the main exclusions being:

• The FIG regime won’t apply to certain foreign income, like specific overseas pensions and foreign employment income paid through third parties.
• FIG also won’t apply to payments from relevant non-UK schemes (RNUKS), pension schemes which received UK tax relief, and offshore life insurance policies and investment bonds taxed under the Chargeable Event legislation.

It is important to note that if an individual claims to be taxed under the FIG regime, they will lose their personal allowance for income tax, and their annual exempt amount for CGT purposes.

Gains that will be exempt from tax under the FIG regime

• Disposal of assets outside the UK
• Gains attributable to settlors of non-resident trusts under the Taxation of Chargeable Gains Act 1992 to the extent the gains accrue to non-UK assets
• Gains attributable to beneficiaries of non-resident trusts
• Carried interest to the extent the gain relates to investment management services performed outside the UK

Trust tax reforms: income tax, Capital Gains and IHT

Income tax

Where a UK resident individual, who is eligible to claim the four-year FIG regime, receives a foreign income distribution from a settlement, the distribution may qualify for relief under FIG.

While settlors/beneficiaries will be able to claim relief under FIG, the income received will not be matched to the income pool in the trust. This means that the distributions will be matched to capital instead. The net result is that income within the trust would be matched to distributions post-FIG allowances.

Post-FIG, income in the trust will be attributed and chargeable to the UK-resident settlor on the same basis as currently applies to UK-domiciled settlors.

However, this can be avoided by careful planning and settlors who may become affected by this need to get specific advice.

Capital Gains

Similarly to the above, matching would apply to capital, not the gains pool in the trust, so gains may become taxable post-FIG.

Post-FIG, gains in the trust will be attributed and chargeable to the UK-resident settlor on the same basis as currently applies to UK-domiciled settlors.

This can be avoided by careful planning and settlors who may become affected by this should get advice.

IHT – Changes to settlements legislation

This part of the reform is very complex, and clients are advised to take specific advice.

From 6 April 2025, the trust protections will no longer apply to the settlements legislation. Settlements legislation is intended to prevent an individual from gaining a tax advantage by diverting his or her income to another person. From 6 April all income arising under a “settlement” will be taxed on the settlor as it arises if:

• The settlor or their spouse/civil partner has retained an interest in settlement property
• The income is provided to, or applied for, the benefit of the settlor’s “relevant” children
• The capital sum conditions are met

This will apply to all UK resident settlors unless they come within the four-year FIG regime and make a claim for the relevant tax year.

Changes to gift with reservation (GWR) rules

The budget introduces changes to the gift with reservation rules. From April 2025, non-UK assets gifted by long-term residents will no longer be excluded from GWR provisions, meaning they could become taxable under UK IHT, even if the gift was made when the individual was not a long-term resident.

IHT and the interaction with IHT treaties

The Government confirmed that none of the 10 IHT Double Tax Conventions are subject to changes to the treaties or how these operate.

It is important to get advice on this as the provisions of the relevant treaties will override domestic legislation.

For example, the South Africa-UK IHT treaty has very specific provisions for when IHT can be charged by either country, and this extends to the levying of IHT where settlements are concerned.

Provided your planning is done correctly, there are options whereby the relevant property regime will not apply to settlements created at a time when the settlor was not UK-domiciled.

Similarly, as far as income tax and CGT is concerned, there are opportunities to avoid the attribution on the settlor which would occur post-FIG.

Pension fund reforms for IHT

Pension funds will now form part of the member’s estate for IHT purposes.

Two things to know:

1. These reforms apply specifically to UK-registered schemes, as well as Qualifying Non-UK pension Schemes (QNUPS). This does not necessarily apply to retirement funds built up abroad before becoming UK resident.
2. The IHT DTA will similarly regulate how IHT is treated in these schemes. For individuals who are UK-tax resident, but not yet UK-domiciled, there may be additional planning options in place.

For specific guidance, consult a tax advisor to understand how these changes impact your circumstances. Get in touch with our Wealth team by calling us on +44 (0) 20 7759 7519 (UK) or +27 (0) 21 657 154 (SA) or emailing wealth@sableinternational.com or email me directly niel.pretorius@sableinternational.com