On 30 October 2024, Rachel Reeves, the Chancellor of the Exchequer confirmed that the UK’s resident non-domiciled (res non-dom) tax regime would be abolished on 6 April 2025, as largely outlined in Jeremy Hunt’s final Conservative budget seven months earlier.
Much has been made of the changes and how they might lead to an exodus of non-doms, but there were a couple of glimmers of hope on 30 October. UK settlors of trusts established before the 30 October 2024 will not be hit as hard as feared by inheritance tax.
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Additionally, the temporary repatriation regime allowing former non-doms to remit income and gains into the UK at a reduced 12% tax rate for tax years 2025/26 and 2026/27, will be extended by a further year to 2027/28, albeit at a slightly higher rate of 15%.
What will these changes mean for private banks and how they manage client assets going forward?
The remittance basis tail
Taxation for UK non-doms will cease on 5 April 2025; however, it is not quite as simple as that. For many years, non-doms and their banks have carefully structured investment portfolios, often by segregating non UK accounts to hold income, clean capital (capital free of income or capital gains), and investments. Consequently, many non-doms now hold accounts outside the UK containing income and capital gains, which would incur a tax charge if remitted to the UK. This will still be the case from 6 April 2025; such a remittance of pre-April 2025, income or gains can be caused by inadvertently buying a UK share or fund or by investing in a UK deposit account. Therefore, banks will have to be on their guard.
Similarly, it will be important for banks not to mix any income or gains in clean capital accounts, either now or after the rules change.
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By GlobalDataForeign income and gains (FIG)
The new FIG regime, effective from 6 April 2025, grants individuals moving to the UK who have not been UK tax residents in the previous 10 years a tax break on most non-UK income and gains for the first four years of UK residence. Even if they have been in the UK for less than four years as of 6 April 2025, they may still be able to claim some relief.
The FIG regime only applies to non-UK income and gains, so banks should only invest in non-UK accounts and non-UK funds and securities while the FIG regime applies to their clients. HMRC has confirmed that gains arising on non-UK life assurance bonds will not be covered by the FIG regime, meaning individuals holding this type of portfolio tax wrapper will need to be careful and possibly dispose of the wrappers before becoming UK residents.
Inheritance tax (IHT)
Individuals will only become exposed to IHT on non-UK assets once they have been UK resident for 10 tax years. However, they will be exposed to IHT on UK assets regardless of their residence status. Banks may need to ensure their clients hold mainly non-UK situs assets for the first 10 years of UK residence or take life insurance to cover the IHT liability on UK situs assets. Once an individual has been a UK resident for 10 years – a long-term resident (LTR) – their worldwide estate will be subject to IHT, and life insurance may play a key role, likely through a policy covering the exposure for a defined term. Under the new rules applying to LTRs, the exposure to IHT will continue for 3 to 10 years following departure, depending on how long the LTR has been in the UK.
Sheltering income and gains
Currently, many non-doms benefit from the remittance basis of taxation, paying no tax on non-UK income and gains, provided they make a claim and do not remit the non-UK income or gains to the UK. However, once the non-dom regime disappears from 6 April 2025, current non-doms will no longer be able to claim the remittance basis and will face income tax on worldwide income and capital gains tax on worldwide gains.
Mortgages
Finally, for non-doms coming to the UK and looking to buy UK property, a mortgage will help with the cash flow of a purchase and with IHT planning. The debt means that capital that would be used to buy a property can be kept outside of the UK and possibly sheltered from IHT in perpetuity in an excluded property trust. However, this planning will no longer be effective after 10 years, as once an individual has become an LTR of the UK, they are exposed to IHT on worldwide assets, and trusts will no longer help in most cases.
There is much to think about for current non-doms and their banks. Even though the non dom-regime regime will come to an end on 5 April 2025, some of the complexities will remain and a new set of complexities will arrive. Non-doms should seek professional advice when considering the changes outlined above in light of their personal circumstances.
Ken Chapman is the Head of Wealth Planning, EFG Private Bank
