Upcoming changes to the UK’s tax regime for non-domiciled individuals (non-doms) may inadvertently deepen the fiscal deficit. The Government’s newly introduced transitional rules, to take effect in April 2025, could accelerate the departure of non-doms, thus reducing potential tax revenue.
A Lucrative One-Way Ticket?
The new rules, effective from 6 April 2025, will end the current reliance on domicile as a tax-defining factor. For a long time, the UK has been the only country to consider an individual’s domicile status. Instead, a person’s tax residence will determine whether their worldwide income and assets fall under the UK’s IHT regime. Non-doms who have been UK residents for at least 10 of the past 20 tax years will be subject to IHT on their global assets, even after they leave for a period of ten years (known as the Ten Year Tail).
However, the proposed transitional rule allows non-doms planning to leave the UK next year to avoid this new 10-year IHT tail, creating a short-term lucrative opportunity for those already considering relocation.
Impact on Offshore Trusts
The reforms will also have significant implications for trusts. Currently, trusts holding non-UK assets are typically exempt from IHT as long as the settlor is not UK-domiciled. From April 2025, however, the trust’s IHT status will depend on the settlor’s residency status.
Previously, a trust could shift in and out of the inheritance tax system depending on whether the settlor was deemed a long-term UK tax resident. This introduces added complexity for trustees, who may not always maintain regular contact with settlors over time.
Trustees could also face an “exit charge” on non-UK assets if the settlor ceases to be a long-term resident.
Urgent Decisions for Non-Doms
With only a few months until the rules take effect, non-doms need to consider whether to relocate to countries with more favourable tax regimes, some of which offer zero IHT.
Next Steps
As the deadline for the new rules approaches, please do get in touch if you require any UK tax support.
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