In the Autumn Budget, the UK chancellor confirmed that the non-dom remittance basis will be brought to end on 5 April 2025 and a new regime will be introduced to replace it, says RSM’s Rachel de Souza in a briefing note.
As a reminder, under the remittance basis, qualifying taxpayers were not taxed on foreign income and gains as long as the funds remained offshore.
The remittance basis disincentivises taxpayers from spending foreign funds in the UK, as (with limited exceptions) they will face a tax charge when doing so, based on their top marginal tax rate – up to 45% for income and 24% for capital gains.
No-one knows the quantum of untaxed foreign income and gains sheltered by the remittance basis and held offshore, as there is no requirement to disclose funds which are not taxable in the UK. However, most advisers estimate such funds to amount to many billions.
The temporary repatriation facility (TRF) is designed to unlock those offshore sources of wealth to boost the UK economy by providing a special reduced rate of tax for qualifying taxpayers for a limited period. It is proposed to allow non-doms to “designate” untaxed foreign funds and pay tax on them at a flat rate – 12% on the value designated between 6 April 2025 and 5 April 2027, and 15% on designations in 2027/28.
There is no requirement to actually remit the designated funds to the UK, although, in practice if you are not intending to remit, there would be no reason to designate. Thus, the theory is that by making it attractive to bring these offshore funds into the UK, the Treasury will benefit from some tax which it would otherwise not have collected, and the economy will benefit from taxpayers spending or investing those funds in the UK.
All of this was in place before the Chancellor made new statements in response to an interview question related to the exodus of millionaires from the UK. In her response, Rachel Reeves indicated that having listened to the concerns raised by the non-dom community, the TRF will be made more generous to avoid punitive tax rates and to widen the criteria to qualify.
Unfortunately, our experience is that non-doms are leaving the UK due to the extension of inheritance tax (IHT) to cover foreign assets held in trusts, and the extension of the length of time it takes to shake off the liability to worldwide IHT after leaving the UK from as little as three years of absence to up to 10 years. Changes to TRF conditions will not have any impact on non-doms who have left the UK altogether.
The Chancellor seems to be listening but not hearing. The exodus of both UK and non-UK doms is not being driven by the need to pay income tax or capital gains tax on remittances, but by the UK’s approach to taxing wealth. Pulling the lever of technocratic changes to tax rates and designation periods will not change taxpayer behaviour.
It is already too late for the potentially thousands of non-dom millionaires who have already left, but if the Chancellor really wants to reverse the trend, she needs to tackle the perceived unfairness of IHT taxing 40% of the non-UK assets of non-doms which are nothing to do with the UK.
A radical approach would be to abolish IHT entirely and replace it with a charge to capital gains tax on death. This would tax the growth in asset values passed to heirs and may have the added benefit of appeasing farmers and entrepreneurs.
