Stay or go? Decision time for both UK non-doms and UK doms as the next General Election approaches

With the UK entering a General Election year and all polls and forecasters predicting a resounding victory for the opposition Labour party, one of the key issues for private clients is the taxation of non-domiciled individuals (‘non-doms‘) who are resident in the UK, writes Simon Denton, managing director of Sovereign UK Ltd.

The next election must take place by 28 January 2025, but Prime Minister Rishi Sunak has stated that it’s his “working assumption” that the election will happen in the second half of this year. Some commentators believe the Tory party conference in October will be the launchpad for an election in November, others believe he could call one in May to coincide with the local elections.

Either way, time is getting very short and almost 70,000 non-doms face decisions about what to do in the event of a Labour victory. Neither party has yet published a manifesto, so there are no definitive policies, but the Labour party has confirmed that it intends to scrap the current non-dom system.

Instead, it is proposing “a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent”. Shadow chancellor Rachel Reeves has said Labour would look at countries including Canada, France and Japan to develop the new system and would consult on the details.

The non-dom regime, which dates back more than 200 years, allows foreigners who are resident in Britain but ‘domiciled’ overseas, to pay UK tax only on their UK sourced income and capital gains. They usually do not pay UK tax on their foreign income or gains, unless they are ‘remitted’ into the UK.

The foreign assets of non-doms are also exempt from UK Inheritance Tax (IHT), unlike UK-domiciled individuals who are liable for inheritance tax of 40% on their worldwide wealth.

Current UK ‘non-dom’ regime

For the first seven years of UK residence, non-UK doms can claim their exemptions without paying a charge, although they lose their domestic personal tax-free allowances. But, after being non-UK domiciled for at least seven of the previous nine tax years, non-UK doms must elect to pay a ‘remittance basis charge’ of £30,000 annually, which rises to £60,000 once they have been non-domiciled for at least 12 of the previous 14 tax years.

After being resident in the UK for 15 of the previous 20 tax years, non-doms are deemed to be UK-domiciled and lose their exemptions. They will therefore become liable to UK taxation on their worldwide income and gains, and their global assets will also become subject to UK IHT.

Any decision to scrap the non-dom regime could have significant repercussions for the UK’s tax revenue and international competitiveness. The latest statistics from HM Revenue & Customs show there were 68,800 non-doms in the UK, who together paid £8.5 billion in UK personal taxes in the 2021/22 tax year.

Of these 2,100 non-doms paid the remittance basis charge in 2020/21, with 1,600 individuals paying £30,000 and 500 paying £60,000.This suggests that most non-doms are working bankers, professionals or consultants, rather than ultra-high-net-worth individuals living off unearned income.

Even if the UK non-dom regime is abolished, it is unlikely that every non-UK dom will want to leave the UK and there are other options, including the legitimate use of offshore structures.

Establishing an Overseas Trust

If individuals place their non-UK assets in an overseas (offshore) trust before they become ‘deemed domiciled’ – after being resident in the UK for 15 of the previous 20 tax years – then these overseas assets will be ringfenced from IHT indefinitely, even if the individual decides to settle permanently in the UK and forego their non-dom status.

However, it is essentail that individuals should establish such structures now, before any changes to the current non-dom system can be announced following a general election. They need to lock in the existing benefits because these should then be retained even if the non-dom regime is scrapped,” he added.

The cost of establishing and maintaining an overseas trust is not excessive, particularly in the context of the potential IHT liability of 40% on worldwide wealth. An overseas trust will also offer substantial additional benefits in respect of estate and succession planning, asset protection and enhanced privacy.

Ending UK tax residence

Alternatively, existing non-UK doms and individuals who are UK domiciled and resident can choose to become non-UK tax resident by increasing the number of days that they spend outside the UK. Depending on their circumstances, this should allow them to retain a home in the UK and spend a limited amount of time (generally, up to 90 days per year) in the UK.

There are a growing number of countries, even EU Member States, that are actively seeking to attract successful entrepreneurs, senior executives, professionals, highly skilled or qualified individuals, and retirees, aged 55 and above through attractive tax residency programmes.

There are existing residency programmes in Italy, Greece, Spain, Portugal, Monaco, Switzerland, Andorra, Malta, Cyprus, Gibraltar and other nations that offer either a flat tax rate or an exemption for foreign-source income. Ironically, many of these programmes make use of the same ‘non-domiciled’ distinction that was fostered by the UK.

Many of these countries also apply special rates of tax to passive income, including pension income, and there is no liability to inheritance tax on foreign assets. Most also offer visa-free travel across the Schengen zone and the potential to apply for EU citizenship.

Acquiring a non-UK Domicile of Choice

Many UK nationals who have lived abroad long term may assume their liabilities to UK tax have ended. Probably they are no longer liable to UK income and capital gains tax except on UK-source gains and income – but they may well remain liable to UK IHT unless they have shed their UK ‘domicile of origin’.

The default position is that those who acquired a UK domicile of origin at birth – 99% of all UK nationals born in the UK – will keep that UK domicile for their entire lives, and with it their liability to UK IHT. However, it is possible for UK persons to acquire a new domicile of choice and it can be hugely advantageous to do so.

Any long-term foreign residents can potentially lose their UK domicile and acquire a new domicile of choice in their new country of long-term residence. Legally, the test is simple and there is only one. Has the taxpayer formed the intent to remain in their new country indefinitely? If the answer is ‘yes’, that person is now domiciled in this new country. But convincing the UK tax authority (HMRC) is not so straightforward.

Generally, it will be impossible to get HMRC to agree that a new domicile has been acquired for the first six or seven years of a taxpayer living abroad but after that , if the facts and circumstances corroborate that statement of intent, there is a good chance that a new domicile has been or can be acquired.

It is necessary to show permanence in the new country through such things as acquiring property and establishing social and economic ties. All a person’s facts and circumstances are relevant, but none are definitive.

The evidence to support the claim of a new domicile of choice should be accumulated and documented during the taxpayer’s lifetime (it is much harder to prove intention after death) and an opinion should then be sought from UK counsel. An opinion confirming that a new domicile has been established will rarely be challenged and will give the best possible protection, unless the facts and circumstances change.

The ’Reversion Trap’

Long term UK expats can face another trap. Even if they have established a new domicile of choice in the country in which they currently live, if they leave that country and move elsewhere, they will lose that new domicile and revert back to their UK domicile of origin. This revived UK domicile is likely to remain in place until they have lived in their new country of residence for sufficient time to claim a new domicile of choice.

The risk is obvious. The liability to UK IHT at 40% is revived and will remain in place until such time as a new domicile of choice has been established. For this reason, the standard advice is to transfer your wealth into trust as soon as you have established a domicile of choice.

Assets held in an overseas trust that was created while the settlor was not UK domiciled will remain outside the scope of UK IHT forever unless the individual returns to the UK. If the individual moves to a third country their UK taxable estate will not include those assets placed in trust, so any revived liability to UK IHT will be reduced accordingly.

Alternative options

UK expats who cannot establish a new domicile of choice can still substantially reduce their UK IHT liability in other ways. Increasingly, wealthy individuals are setting up Family Investment Companies (FICs).

This is relatively simple. Assets are transferred to an offshore or UK company. The rights and obligations attaching to the shares of that company are divided between shares that carry votes only, shares that carry the right to income (dividends) only and shares that carry the right to the underlying assets (capital).

The transferor retains the voting shares and thereby controls the assets and the affairs of the company. He/she may also retain some or all of the income shares so they can receive dividends during lifetime. But the capital shares are immediately or progressively given away to family members. The gift of the capital shares will be a Potentially Exempt Transfer (PET) so will be tax free if the donor survives the gift by seven years.

We strongly recommend that anyone who has any doubt about their domicile should seek expert advice at the earliest opportunity.