Change is coming: what do the proposed changes to the UK's non dom tax regime mean for UK and UAE based investors?

Whilst the UK remains an attractive location for those looking to relocate their families to and/or invest in, over recent years the United Arab Emirates ('UAE') has experienced an ever-increasing popularity for those looking to relocate to a tax-friendly environment to conduct their business, establish a family office, and for individual and family relocation.

The tax, regulatory and immigration process (in the form of a Golden Visa) are just a few of the contributors making the UAE a favourable environment to operate from, as well as the location and warmer climate.  

This article provides a high-level overview of the impact of the UK Government's proposed changes to the existing tax regime and highlights key considerations for people choosing to make the move to and from and investing in the UAE and UK.

UK Government proposals

On 6 March 2024, the Conservative Government announced that it would bring into force significant changes to the UK's non-dom regime from 6 April 2025.  As a result of a surprisingly timed General Election that saw the Labour Party take control of the Government, the UK is waiting to see how the new government will approach and implement these changes. 

On 29 July 2024, the Treasury released three papers giving further detail on the key tax policies from the Labour manifesto.  We expect more detail on the Government's policies during the Chancellor's first Budget speech on 30 October 2024, we have set out the current position below.  

Whilst we wait for policy decisions and new legislation to be introduced, Withers have been analysing proposals and what this means for our clients which you can read more about here:

• UK Budget and the end of the non-dom regime as we know it
• Labour's non-dom update
• Non-dom changes: will Rachel Reeves soften her approach?

Relocating to and/or investing in the UK from the UAE

I live in the UAE. If I invest in the UK, will this make me a UK resident?

Put simply, no. You will only become tax resident in the UK if you satisfy the requirements set out in the Statutory Residence Test ('SRT') which, broadly, focuses on how much time you spend in the UK during a tax year. The amount of time and your "connections" to the UK during that tax year. So, for example, acquiring a second home in the UK would not automatically make you tax resident in the UK, but it would be a connection that may influence the number of days that can be spent in the UK.

More details on the SRT can be found here. 

So, if I invest in the UK without becoming UK resident, how will I be taxed in the UK?

Non-UK residents are subject to: 

• UK income tax on UK source income (for example rental income from UK real estate); 
• UK capital gains tax ('CGT') on direct or indirect disposals of UK real estate; and 
• inheritance Tax ('IHT') on UK situs assets owned on death, or on certain lifetime transfers of UK situs assets. IHT will also apply to the value of UK residential property which is indirectly held via a corporate entity and can also apply to the value of certain qualifying loans used for the purpose of acquiring interests in UK residential property.

We do not expect the Government to announce any changes to these rules.. 

If I do become UK resident, how will I be taxed in the UK?

Broadly speaking, if you become UK resident, the Government's proposals will impact you as follows: 

• The default position is that your worldwide income and gains become subject to UK income tax and CGT, as well as those arising in the UK. 
• However, provided that you have not been UK tax resident for the previous ten tax years, you will be able to elect to limit your exposure to UK income tax and CGT on your non-UK income and gains for a period of time after becoming UK tax resident (this is known as the 'FIG Regime'). At the time of publishing, the Government has indicated the period will be limited to four tax years. If such an election is made, you can bring the non-UK source income and gains to the UK tax free.  After four years (or the time period set by Government), you cannot benefit from this regime and you will be subject to UK income tax and CGT on your worldwide income and gains on an arising basis, regardless of whether you bring the funds to the UK or not; 
• If you are already UK tax resident, there may be a 'Temporary Repatriation Facility' available.  If you have been utilising the remittance basis (i.e. you have elected to be taxed in the UK only on your UK source income and gains, and your worldwide income and gains that you remit (or bring) to the UK) and you have accumulated foreign income and gains, you may be able to remit them to the UK during the 2025/26 and 2026/27 UK tax years, subject to a rate of tax to be announced.
• exposure to UK IHT will be reformed so that it becomes a residence-based test, rather than one linked to domicile.  Therefore, once you have been resident in the UK for 10 tax years, your worldwide estate will be subject to IHT at 40%; and 
• if you are UK resident and the settlor of a trust and you cannot benefit from the new FIG Regime, you will be taxed on the trust's income and gains on an arising basis.  We expect these rules to apply to trusts in which the settlor, spouse or descendants have a right to benefit from the trust assets.

You should also bear in mind existing rules that may result in any UAE companies that you are a director of, any UAE foundations that you are a council member of and any UAE trusts that you are a trustee of, becoming UK tax resident as a result of your change of tax residence position. Advice should be sought on your personal tax status and the impact on any entities of which you are a controller or have decision making powers before acquiring UK tax residency.

There is also speculation that the Government will increase the rates of CGT (18% and/or 24% for residential property and 10% and/or 20% for all other assets) to align them with income tax rates (20%, 40% and 45%).  Berry Bloomberg's article considers what steps you may take to mitigate CGT if you have assets standing at a gain.

Leaving the UK for the UAE

If I become non-UK resident, how am I taxed in the UK?

If you become non-UK resident, you will only be subject to UK tax on UK source income, and gains arising on direct or indirect disposals of UK property and land. 

Special split year treatment can apply in certain circumstances during the tax year when you leave the UK which can be favourable in protecting foreign income and gains arising during the period that you are outside of the UK.

For CGT purposes, where possible, disposals of assets should therefore be delayed until the tax year following departure. Temporary non residence rules means that you must remain non-resident for 5 tax years to avoid the CGT being triggered on a return to the UK

Although there is currently no personal income tax or CGT regime in the UAE, in 2022 the UAE introduced rules defining what it means to be tax resident in the UAE. This makes it easier for individuals to make their tax residency status clearer and to be able to benefit from provisions of Double Tax Treaties (see below).

The UAE does have a Corporation Tax regime and so the control and management of UK companies should also be considered for directors relocating to the UAE. 

What about estate tax when I leave?

The new regime proposes that anyone who has been UK tax resident for at least ten tax years, will be subject to UK IHT (currently 40%) on the net value of their worldwide assets.  This UK IHT exposure will fall away once you have been non-UK tax resident for a period of ten tax years.  

This is a significant change for foreigners who have been in the UK on a temporary basis, as the current rules mean that IHT applies to their estate if they have been UK tax resident for 15 out of 20 tax years.

For those with a British domicile of origin who may be leaving the UK for the first time, the proposals are however arguably simpler as there is certainty that the IHT exposure is lost after a period of 10 years. Existing rules require proof that the person intends to reside in the UAE permanently and indefinitely – which traditionally involves detailed legal analysis and is difficult to apply to those who may not have made concrete plans on living in the UAE forever.

Regardless of residence (and domicile), the value of UK situated assets owned will remain within the UK IHT regime.

What if I decide to relocate back to the UK?

Under current rules, if you have a domicile of origin in the UK, but have been living in and have acquired a domicile of choice in UAE, for UK tax purposes you will be deemed a 'formerly domiciled resident' ('FDR'). Special rules will apply if you decide to return to the UK, even on a temporary basis and you do not intend to remain in the UK indefinitely.  If UK residency is re-established, an FDR will be subject to UK income tax and CGT on an arising basis, and they cannot utilise the remittance basis.  Furthermore, once an FDR has been UK resident for one tax year, their worldwide estate will be subject to IHT. Therefore, planning should be undertaken before extended time is spent in the UK, especially in relation to UAE assets and investments to minimise the risk of them being subject to UK taxes.  

It remains to be seen how such individuals will be impacted by the Government's changes, but we expect the Government to follow a similar approach as the current regime for those with a British domicile of origin. 

Double Tax Treaties (DTT)

The UAE has DTTs with over 130 countries, including the UK. Establishing tax residency under the DTT will help to clarify which jurisdiction retains taxing rights on certain incomes. For example, a person carrying on a business in the UAE whilst remaining UK tax resident will only be subject to UAE Corporation Tax on income arising from the business activities.   

It is important for people with connections to both regions to understand their residency status under the DTT, to ensure that they comply with reporting requirements in each jurisdiction and to maximise tax efficiencies. 

Looking to the future

This is a period of uncertainty in the UK which we hope will be largely resolved in the Chancellor's Budget speech on 30 October 2024.  Withers is closely tracking the changes and is well placed to advise those looking to relocate from or to the UK.