Ex-Pats: How do the planned new nom-dom rules impact you?
Although the UK March 2024 Budget took center stage by fundamentally reforming the system of taxing “non-doms”” not much attention has been paid to how these changes may affect individuals who have connections to the UK.
The changes could be perceived as positive, however, as no draft legislation has been published yet, there is still a long way to go before the proposed regime is eventually introduced. This blog will analyse how the policy papers presented on Budget Day may affect British expatriates (“ex-pats”).
If you are an ex-pat, the parts of the change in legislation that may impact you are:
The new concept of the 4-year special tax regime: those who qualify will be exempt from tax on their foreign income and gains for the first four years of UK residence, regardless of whether they are remitted to the UK. All individuals who were not UK resident in the previous ten tax years will be eligible for the 4-year special tax regime, irrespective of their domicile
Domicile will no longer be a connecting factor for IHT: A new residence test will be introduced. Non-UK estates of those non-UK residents for two years will be outside IHT.
Tax Planning Considerations for British Ex-Pats
Returning to the UK?
If an ex-pat returns to the UK to live permanently, they are treated as domiciled in the UK and their worldwide income or gains are taxed in the UK. In the proposed new rules, effective April 2025, there is an exemption to the rules for any individual who comes back to the UK after being away for ten years. The exemption allows for non-UK income and gains to not be subject to tax for the first four years of residence.
Your IHT position?
Currently, if you are a UK resident, your worldwide estate is liable to IHT.
if you then leave the UK, legally become domiciled in another country, or move around globally and have no intention to return to the UK, then your IHT position is currently a little unclear as you have been domiciled for a period of time in the UK, although you may not be now. If you then return to the UK, you would need to seek advice on your IHT position, bearing in mind periods of time spent elsewhere in the world.
However, with the new proposed changes, IHT will be based on your residency status. This means that your non-UK assets will cease to be included as part of your UK estate and you will not be liable for IHT after ten years of living permanently away from the UK.
Can I still create a trust under the new planned rule changes?
Currently, when you transfer assets into a trust structure in the UK and you are an ex-pat, there is an immediate IHT liability on the transfer of assets to a trust as well ongoing IHT considerations.
More certainty on the tax treatment for ex-pats when setting up trusts is likely to become clearer from April 2025, when it is unlikely that the upfront IHT charge will not take place.
So if you are setting up a trust to protect your assets for future generations and you are doing some long term tax planning, then it would be useful to wait until April 2025 to consider a trust set-up.
When it comes to consideration of the ongoing IHT liabilities of a trust structure, a word of caution is that even if a trust is not initially in the scope of IHT, the trust may come into scope of IHT at a later date if circumstances change, such as a permanent move back to the UK and once again becoming a permanent UK resident.
What is coming down the road?
The planned nom-dom status announced at the March 2024 Budget, moving the system to a residence-based test, is likely to happen, although the details are currently in the consultation phase before planned implementation from 6 April 2025.
In theory, these changes are a good thing for tax simplification, however, we still strongly recommend you take advice if returning to the UK, as returning to the UK after a period of time being a nom-dom can have implications for the tax treatment of your assets, within a trust structure, or not.
