UK Non-Dom Tax Changes: What High Net Worth Individuals Need to Know

The UK's approach to taxing non-domiciled individuals underwent a seismic shift on 6 April 2024, marking the end of the centuries-old remittance basis system. In a recent discussion with tax experts Neal Lees and Justin Stevenson from Buzzacott's private client and tax investigations teams, the implications of these changes for high net worth international clients became clear.

The End of an Era

For generations, the UK's non-domiciled tax regime offered a unique advantage to wealthy international residents. Under the old system, individuals who were UK resident but not domiciled here could elect for the remittance basis of taxation, paying UK tax only on income and gains actually brought into the country. While this came with a remittance basis charge after seven years of UK residence, and deemed domicile status after 15 years, it provided significant tax planning opportunities for those with substantial overseas assets.

"The old rules could be tax efficient but were difficult to administer," explains Neal Lees, highlighting one of the key criticisms that ultimately led to their abolition.

The New Landscape

The reformed system has swept away the remittance basis entirely, replacing it with a residence-based approach that brings greater certainty but fewer planning opportunities. The centrepiece of the new regime is the four-year Foreign Income and Gains (FIG) exemption, available to individuals who have been non-resident for at least ten consecutive years before returning to the UK.

This exemption must be actively claimed on an individual's tax return and applies to unremitted foreign income and gains that weren't previously declared under the old system. For inheritance tax purposes, the changes are equally significant, with liability now based on residence under a "10 out of 20 years" rule, potentially followed by a tail period of up to ten years depending on the length of UK residence.

HMRC's Increased Scrutiny

Justin Stevenson warns that these changes will inevitably attract heightened attention from HMRC. "HMRC are always interested in offshore matters," he notes, pointing to the tax authority's track record of high-profile campaigns targeting perceived non-compliance among those with overseas assets.

The recent success of HMRC's Worldwide Disclosure Facility, which issued thousands of nudge letters to taxpayers with overseas assets using information received under international reporting standards, demonstrates their enhanced capability to identify potential discrepancies. With the FIG exemption representing a potentially valuable claim for many clients, HMRC will be particularly keen to verify that the new rules are being correctly applied, especially in cases involving substantial overseas income.

"Those who don't take appropriate advice run the risk of facing not only additional tax liabilities but also potential penalties, which are typically higher for offshore matters," Stevenson cautions.

Planning Opportunities Still Exist

Despite the dramatic nature of these changes, it's not necessarily too late for affected individuals to take action. Several transitional provisions remain available, including a temporary repatriation facility for former non-doms and the ability to wind up offshore structures within the current tax year. Additionally, there's provision for rebasing assets to April 2017 values, though this may have limited practical application.

Interestingly, some positive trends are emerging from the new system. The certainty provided by the residence test has benefits for specific groups: short-term arrivals can take advantage of the four-year exemption, UK-domiciled individuals are finding opportunities in returning to the UK or breaking residence for inheritance tax purposes, and the 12% rate available under the Temporary Repatriation Facility is proving attractive for repatriating funds from offshore structures.

Notably, American taxpayers, already subject to worldwide taxation in their home jurisdiction, appear less deterred by the UK changes and continue to consider relocating to Britain.

Broader HMRC Focus Areas

Beyond non-dom taxation, HMRC's attention spans several other areas of concern for high net worth individuals. Property transactions continue under scrutiny, with Stamp Duty Land Tax challenges becoming more frequent, particularly around Private Residence Relief claims involving multiple disposals.

Post-Brexit complications are creating new compliance challenges, especially for smaller businesses that may not have sought appropriate advice on duty obligations. More seriously, there's been a notable increase in serious fraud investigations, with more COP9 cases being opened following new guidance issued in June 2023.

The Path Forward

For those affected by these changes, professional advice is more crucial than ever. Whether planning strategically for the new rules or addressing past compliance issues, the complexity of the reformed system demands expert navigation.

As Neal Lees concludes: "We can help plan and strategise for the new rules and ensure tax returns are accurately completed." For those who find themselves less prepared, specialist tax investigation expertise becomes essential to resolve matters proactively while minimising penalty exposure.

The UK's non-dom tax revolution represents both challenge and opportunity. Success in this new environment will depend largely on understanding the rules and seeking appropriate professional guidance to navigate them effectively.