Non-dom changes: will Rachel Reeves soften her approach?

In the last 24 hours, government officials have been briefing the press that the UK chancellor, Rachel Reeves, is prepared to revisit the detail of expected radical reforms to the taxation of non-UK domiciliaries. This will no doubt come as welcome news to those UK resident taxpayers (and those intending to move to the UK in the near future) whose personal financial planning has been thrown into chaos over the last eight months.

Since the announcement by the former Tory chancellor, Jeremy Hunt, at his 6 March Spring Budget that he would abolish the remittance basis of taxation, the expected future UK tax landscape for non-UK domiciliaries and those who had previously chosen to be taxed on the remittance basis has been constantly shifting.  The uncertainty that has generated, while inevitable given the change in governing party, has led to difficult decisions for many current UK taxpayers and those intending to move here.  Advisors to non-UK domiciliaries have already seen clients leave to set themselves up in alternative jurisdictions where the tax regime for new arrivals appears more certain.  Whatever the final position on non-dom taxation is, this protracted period of uncertainty has benefitted neither taxpayers nor the Treasury.

The first signal of a possible change in approach appeared in the Guardian on Wednesday this week, where it was reported that senior government sources feared that the Office of Budget Responsibility may forecast that the changes to the taxation of non-doms may cost more revenue than they raise, given the number of current non-doms who are expected to cease UK tax residence.  Yesterday, the Financial Times, among other outlets, reported a government official saying that they are 'looking at the details of our proposals' and that they would be 'pragmatic, not ideological.  We won't press on regardless, but we are not going to abandon this completely.'  Quite what that means is now a matter of much debate.

There seems to be no doubt that Reeves remains committed to ending the remittance basis of taxation – the system which currently allows non-UK domiciliaries to be taxed in the UK only on their UK source income and gains, as well as foreign income and gains which they bring to the UK, for up to 15 years (paying a relatively modest charge for doing so after seven years of UK tax residence).  A replacement, much narrower, regime for new UK arrivals had been proposed by the Conservatives and adopted by Labour.  The 'foreign income and gains' regime would provide protection from UK taxation on foreign income and gains whether they are brought to the UK or not, for a period of just four years.  On top of that, trusts settled by non-doms which had previously benefitted from 'protected' status (meaning their income and gains escaped UK taxation potentially indefinitely) would lose that status, causing the income and gains to be capable of being taxed on a UK tax resident settlor on an arising basis.

To take the edge off these significant reforms, the Conservatives had proposed that trusts settled before 6 April 2025 would remain outside of the UK inheritance tax net, and foreign income arising to former remittance basis users in the 2025/26 tax year would benefit from temporary relief from tax of 50%.  Labour declared these two proposals 'loopholes' and said they would not adopt them.  The result of Labour's modification would be that trusts settled by individuals who moved to the UK and clocked up 10 years of tax residence would fall within the scope of inheritance tax and, it would seem, be taxed in the same way as trusts settled by UK domiciliaries (with charges at 6% of the value of the trust fund each ten years, and charges of a proportion of that amount when capital leaves the trust).  

There is a clear case for reform of the remittance basis of taxation and many current non-UK domiciliaries could make peace with the abolition of the remittance basis.  It must be acknowledged it made the UK highly attractive to international entrepreneurs and wealth creators and there is an exciting opportunity to create a fairer and more efficient regime that would put the UK ahead of an increasingly crowded international field.

However, the prospect for non-doms of being brought within the scope of inheritance tax not just on their own estates but also on the value of trusts settled perhaps years before they even considered moving to the UK was unappealing. When viewed in the context of the UK's headline rate of inheritance tax of 40%, among the highest in OECD countries, it is clear that it is an intuitively difficult prospect for those individuals coming from countries with either no death taxes or only modest ones.  

It is clear, in our experience, that the inheritance tax changes relating to trusts are a potentially more powerful deterrent to longer term residence in the UK than the reform of the remittance basis, especially for business owners, given the current question mark over the longevity of business property relief.  While there is a strong case for the reform of the taxation of non-domiciliaries – the current system being outdated, unpopular among the wider public and not fit for purpose – the behavioural response of non-doms, which it now seems may actually be acknowledged by the OBR, shows that, as with many ideologically attractive tax changes, this is not simply a question of 'turning on' new rules and reaping the revenue.  We have already seen relocations to places with competitive tax regimes for inpatriates such as Italy, Switzerland, Spain, the Channel Islands and the UAE.  The chancellor now has a golden opportunity to halt that flow of departures by implementing a reformed tax system for inpatriates that genuinely supports both the UK economy and the public purse, and we hope she doesn't miss it.

We look forward to further clarity following the budget and will be holding a number of seminars in various locations where we will provide a comprehensive overview of the most critical changes. Please sign up using the links below.