London-based accountancy firm, Grunberg & Co, has urged caution in response to plans by the Shadow Chancellor, Rachel Reeves, to significantly curtail the proposed period of transition as non-domiciled tax status is abolished.
Following the Chancellor’s announcement that the non-dom tax regime would be abolished in the Spring Budget, current proposals would allow foreign-held assets that meet specific criteria to be exempt from Inheritance Tax, and offer a 50 per cent income tax discount in the first year of new rules to those non-doms that have previously been taxed on the remittance basis.
However, the Shadow Chancellor plans to abolish both of these measures with plans to raise a further £2.6 billion for the Exchequer.
Nimesh Patel, Tax Partner at Grunberg & Co, said: “The Shadow Chancellor’s plan to remove the exemption on 50 per cent of foreign income would mean more income tax is payable by non-domiciled individuals in the 2025/26 tax year. Therefore, the income tax liability for the 2025/26 tax year will be higher.
“In many cases, this will result in individuals having their cashflow heavily reduced in a short space of time as the income after tax will drop significantly in the space of one year.
“The purpose of transitional period is to avoid cases like this and allow individuals time to adapt to the new rules.”
What does this mean?
The firm advised those impacted by new regulations surrounding non-doms to complete and implement any tax planning early, as the new rules do not take effect until 6 April 2025.
The firm also urged non domiciled individuals to give thought as to how their investments are structured, as income is taxed at a higher rate than capital gains.
Nimesh said: “If there are opportunities to bring forward non-UK income and capital gains so they are taxed in the 2024/25 tax year, it will enable more income and capital gains to potentially benefit from the remittance basis if the level of foreign income and capital gains is large enough to justify the cost of claiming the remittance basis.”
Additionally, for individuals who spend a lot of time out of the UK each year, there is the option to reassess the amount of time spent in the UK, potentially reducing it to a level where such individuals are not considered UK resident for tax purposes. This would mean that their non-UK income and capital gains would not be taxable in the UK.
The issue of inheritance
Proposed new rules would also dictate that domicile status does not determine which assets are liable to Inheritance Tax (IHT), instead moving to a residency-based system which uses an individual’s tax residence history to determine which assets are liable to IHT.
“It should be noted,” said Nimesh, “that even under the current rules, long term residents of the UK are eventually liable to IHT on worldwide assets.
“The impact of the new rules is that it would take less than 15 years for non-domiciled individuals to become liable to IHT for non-UK assets, meaning that IHT planning would need to be implemented sooner.”
Ultimately, concluded the firm, the transitional period allows impacted individuals to adapt to the change in rules and manage their cashflow.
Nimesh finished: “Many non-doms have significant financial commitments, so they will need to ensure they have time to do any necessary restructuring of their finances.
“By not having a transitional period, non-UK domiciled individuals who are not as wealthy may struggle. Providing a buffer is one of the main purposes of the transitional period.”
