Non-UK domiciliary regime - an analysis

On 6 March 2024, the Chancellor of the Exchequer, the Rt Hon Jeremy Hunt MP, announced the creation of a new regime for individuals commencing UK residence, which is intended to apply from 6 April 2025.

We have summarised the main features of the proposed new regime in a separate note. This article is intended to place the proposed new regime in its wider context. 

The non-UK domiciled regime

The tax treatment of UK resident non-UK domiciliaries has long been the subject of political debate in the UK. Changes have been made to the regime on a regular basis, starting in 1998, and in 2008, 2014, 2015, 2017, and now in 2025. (More minor tweaks have been made at different stages in the interim.)

This process has in and of itself been unsettling and has probably had an impact on the numbers of those willing to come to the UK. There have been other reasons for people choosing not to move to the UK, such as the removal of the investor category visa, and perhaps Brexit, but the sense that the non-UK domiciliary regime would not last forever has undoubtedly been a powerful factor in some people’s minds in their decision-making. At the same time, other regimes have been created (most notably by Italy and Greece) which are based on the UK rules but are significantly more generous. As a result, wealthy individuals probably now have greater choice than they have ever had if they want to take advantage of a time limited but tax advantaged status. Some attractive inpatriate regimes (such as the Portuguese regime) have come and gone but overall, the number of international competitors to the UK has grown.

There would seem to be both financial and political reasons for the announcement of a new regime. The financial aspect is that the Government expects to raise £2.7bn from UK resident non-UK domiciliaries, thereby counterbalancing the revenue loss from the reduction in the rate of national insurance contributions. The political aspect is that the taxation of non-UK domiciliaries has been a feature of past election campaigns (particularly the 2015 campaign) and would undoubtedly have been (and may still be) a feature of the 2024/25 general election campaign. This is partly because of the position of the Prime Minister’s wife and partly also because the position of non-UK domiciliaries has been portrayed as a “loophole” for the wealthy which needs to be closed.

It is perhaps ironic that, two days before the Budget, the Institute for Fiscal Studies published a paper which provides colour to the taxation of non-UK domiciliaries. This paper essentially urged caution as to whether any anticipated revenue increase would turn out to be real. However, this contribution to the debate came too late to influence the Chancellor and the 6 March announcements must mean that the prospect of any significant amendment of the proposals is very low. In essence, the debate as to the amount that may be raised, and the contribution of non-UK domiciliaries to the UK economy, whether visibly through the tax that they actually pay or more intangibly through the ecosystem which they support, is now over.

Significant reform of this area of taxation is inevitable. It is now the policy of both of the UK’s main political parties to abolish the existing regime. In practice, whichever party forms the next Government, we anticipate that the changes they introduce are likely to be substantially in the form now proposed.


The timing of the introduction of the new regime is interesting and again illustrates the essentially political nature of the changes. Whilst the changes were announced on 6 March, no legislation was published. The timing of any legislation is uncertain with the announcement simply noting that “draft legislation… will be published later in the year for technical comments”. The announcement was explicit that the proposed changes to inheritance tax are the subject of consultation, so whilst the principles may be clear the detail is far from settled.

Here, the electoral timetable is important. The new regime marks something of a clean break with the past. From 6 April 2025, the concept of domicile will be of only partial relevance for UK tax purposes and when the proposed transitional provisions fall away domicile is likely to be of no relevance for inheritance tax and for income and gains arising after 6 April 2026.

However, today, the infrastructure of our legislation for capital gains, income tax and inheritance tax purposes is built on the foundations of residence, domicile and the situs of assets. As a result, if done properly, it is likely that there will need to be wholesale revisions of our existing tax code to implement the new legislation.

This is not the work of a moment. It is notable that the 2008 changes in this area (which are arguably simpler) ran to 72 pages of legislation in Finance Act 2008. At that time, it took three months to produce the initial draft legislation which was clearly deficient and in effect had to be withdrawn. The recent announcements raise numerous questions of detail which will need to be thought through, and it is likely that the “technical comments” on the new legislation for capital gains tax and income tax purposes will be extensive. For this reason, we can expect that the process of drafting the new legislation and therefore the construction of the new regime is likely to be somewhat lengthy, as it should be because it is important that there is absolute clarity as to the new regime on its introduction.

The Budget resolutions that have been laid before Parliament do not cover the proposed reforms to the taxation of non-domiciliaries, and the new regime will not therefore form part of this year’s Finance Bill which will follow the Budget, which is likely to be passed in July. A more realistic timetable might be that the new legislation is itself published at some point in the summer (say July), and then refined over the autumn. The electoral timetable will almost certainly intervene in the process. If there is an election either in October or in November (elections in the depths of winter being uncommon in the UK), then it will be challenging for the new legislation to be passed in the form of a second Finance Bill before the end of this Parliament. That timetable may prove to be overly pessimistic, but we would regard it as realistic if a thorough job is to be undertaken of what will be complex drafting with the risk of unattractive (and unintended) consequences if it goes wrong.

Typically, at the end of a Parliament only legislation which has broad cross-party support can be passed in what is known as a “wash-up” process. Given the fact that (as the Leader of the Opposition pointed out in his comments to Jeremy Hunt) the policies in question have in effect been appropriated by the current Government from the Labour Party, it might be thought that there should be consensus for the introduction of the new regime.

However, it is far from certain that this will be the case, and it is unclear whether the Labour Party will welcome all aspects of the new regime. Whilst there are features of the regime which should be uncontroversial from their perspective (for example, the treatment of income and gains in the first four years of residence, the four-year residence period itself, and the requirement to be non-resident for ten years in order to benefit from the regime) there may be details which are more controversial. Although there are good arguments for putting in place transitional protections to mitigate some elements of the changes for existing taxpayers (and potentially reduce the number of people who are likely to leave) some of them have been criticised.

In other words, it is possible that the Labour Party would prefer to pass this legislation on their own terms which would increase the likelihood of the legislation only being passed following the election (by whichever party wins the election). This is not certain (it is conceivable that legislation could be passed over the summer) but the process needs to start urgently, and it would be somewhat hurried in any event.

All of this means that, until the Labour Party clarifies its position on the Government’s proposals, there will be a period of uncertainty and the Government’s proposals should be seen to be simply that. They are not guaranteed to become legislation in their current form (both as to inheritance tax which is explicitly the subject of consultation but also as to capital gains tax and income tax). This means that UK resident non-UK domiciliaries have some difficult choices as to what they do in the period before 6 April 2025 and they may not be able to plan with complete clarity during that period.

In our view, there is a good chance that the legislation cannot be passed in this Parliament, and therefore it needs to be addressed in the next Parliament. The Labour Party may prefer this because, assuming they win the election, it allows them to take responsibility for the changes which have long been their stated policy. They can therefore say that they have “abolished” the regime for the taxation of non-UK domiciliaries. If that happens, whilst we anticipate that the core of the proposed regime will remain the same, there is a significant chance that some of the more detailed aspects are changed, and there is also just a chance that the implementation date slips, for example to 6 April 2026. Depending on the implementation timetable it is possible that we will be in a similar position to when the 2008 changes were published in final form less than a month before their implementation date. All of this heightens the uncertainty for non-UK domiciliaries and the only way in which that uncertainty can be dealt with is through a clear statement of the Labour Party’s position. However, there is no indication that such a statement will be forthcoming.

An assessment of the new regime

For those coming to the UK for the first time after the introduction of the new regime (on the assumption that it is introduced in the form announced), and with no knowledge of the existing rules on the taxation of non-UK domiciliaries, we think that there will be some attractions to the UK.

The first is simplicity. If an individual becomes UK resident, then their foreign income and gains will not be subject to UK tax for their first four tax years of residence. As a result, we would anticipate that individuals who are planning a major exit from a business within that four-year period will be attracted to the UK. In this sense, the regime is better than Italy, because in Italy there can be significant problems with disposals of major private company shareholdings in the first five years of residence. Further, the level of engagement with HMRC is unlikely to be significant because the typically problematic areas of investigation (for example into unintentional remittances or the tainting of foreign trusts) will simply be irrelevant.

The ability to remain in the UK for up to ten tax years without becoming subject to UK inheritance tax (presumably except on UK situs assets) is also attractive.

Another attraction of the regime is that it creates a level playing field between returning UK domiciliaries and non-UK domiciliaries. An individual with a UK domicile of origin who has been non-UK resident for at least ten complete tax years can return and benefit from the regime. There are some who will no doubt be willing to do so.

The regime may also be helpful to UK domiciliaries who wish to mitigate inheritance tax (for example where business property relief is not applicable) as they will have certainty that if they cease UK residence for ten years then they will likely be outside the scope of UK inheritance tax. Such a shift need not come with the potentially challenging severing of ties associated with abandoning a UK domicile.

There is no doubt that this is a simpler regime than that which exists today. Difficult questions as to whether individuals are domiciled in the UK or not, particularly for departing UK domiciliaries, will cease to be relevant. There should be less for HMRC to investigate and as a result there should be less need for contentious engagement with HMRC (whose enquiries can be one of the leading reasons why individuals decide to leave the UK).

That having been said, there will be criticisms of the regime. Importantly, the four-year period is really very short, especially when looked at in the international context. The Irish remittance regime does not have a time limit, the Italian and Greek regimes are each available for 15 years, a French inbound regime lasts for eight years and the Spanish “Beckham” law lasts five years.

A four year period is significantly less attractive. Such a short period could also be said to encourage what might be termed “fiscal nomadism”. Individuals who choose to benefit from the regime are likely to leave a limited footprint in the UK. After all, why would they purchase a property, or invest in the UK, if they only choose to be in the UK for four years? Paradoxically, the changes to inheritance tax could provide an incentive for UK domiciliaries to leave the UK.

It is inevitable that these changes will cause some people to leave the UK and similarly there will be an impact on those who would otherwise choose to come to the UK. The extent to which existing UK resident non-UK domiciliaries leave the UK may turn significantly on the treatment of non-UK trust structures. Our analysis is that if the confirmation that excluded property status will apply to foreign situs property held by the trustees of trusts settled prior to 6 April 2025 survives, then this will act as a major reason why individuals may choose to stay in the UK. For some clients, the incidence of capital gains tax and income tax is arguably less important than exposure to inheritance tax.

We can also anticipate that non-UK domiciled taxpayers who elect to remain in the UK will be looking to mitigate their liabilities by claiming defences against the attribution of income and gains in structures of which they might be the settlors. So, for example, we would expect that the income tax motive defence will frequently be deployed for income and the capital gains motive defence deployed for capital disposals in underlying companies owned by trustees. Further, we would expect a renewed focus on using corporate exemptions such as the substantial shareholding exemption, and we would also expect individuals who elect to remain in the UK to start looking at life assurance and other financial products.

Obviously, the need to claim defences depends on the situation of each individual structure. Additionally, for those who are simply beneficiaries and not settlors of trusts it may be that the new regime is acceptable – paying tax on distributions received on a global basis may be an appropriate price to pay for remaining resident in the UK.

As a result, if the regime is implemented as proposed, we can see that there will be winners and losers. However, as noted there will be a reasonably substantial body of individuals for whom the new regime simply does not work, and those individuals are likely to be incentivised to leave the UK in advance of 6 April 2025.

What next?

If individuals affected are staying in the UK, at least in the short term, an obvious question is whether they will want to create, and fund, trusts in advance of 6 April 2024 or 6 April 2025. Here individuals face a difficult decision.

Take the example of an individual who becomes deemed domiciled on 6 April 2024, but who remains non-UK domiciled. Such an individual would have wished to have created a trust prior to 6 April 2024 to hold excluded property for inheritance tax purposes and potentially to up base his or her assets for capital gains tax purposes.

Now, however, if in the 2024/25 tax year the announced changes are rowed back from, particularly as regards the excluded property status of trusts, the individual may find themselves trapped, with an inability to unwind the trust structure without potentially significant charges to tax, and an inability to mitigate inheritance tax on death. This would be an unattractive scenario.

In our view it is unlikely that there will be a universal rule that can be followed. In each case the relevant individual will have to take a decision as to whether to create and fund a trust to take advantage of what appears to be a generous regime in the knowledge that the regime may not exist by the time the changes are implemented. There will therefore be a risk factor for those who become deemed domiciled in the UK on 6 April 2024 or 6 April 2025. Each individual’s circumstances will need to be examined on a case-by-case basis.

Other matters

Simplification of the regime governing the taxation of non-UK domiciliaries is a good thing, but in our view it should be combined with other simplifications. This would be designed to make the UK as attractive as possible for an individual becoming resident here.

One obvious example is that the statutory residence test which has applied since 6 April 2013 will become exceptionally important under the new regime. For an individual to know when and in what circumstances they are resident in the UK is critical. Although the statutory residence test is intended to provide certainty as it currently exists it is close to inoperable for many individuals. That is because of its complexity (particularly for those working), and the level of record-keeping on which HMRC tend to insist if they investigate the individual’s situation. After a decade in which the idiosyncrasies of the test have become clear, in our view there is a compelling case for revisiting the system and simplifying it, just as the regime governing the taxation of non-UK domiciliaries will be simplified.

As we have noted, the new regime has attractions and some individuals will be comfortable with accepting the additional tax cost in certain circumstances. However, in our experience, it seems clear that these changes will cause individuals to leave the UK and it is likely that fewer individuals at whom the new regime is aimed will come to the UK. A longer time period would help with this, but we also believe that it would be sensible for a full review to be undertaken five years after the implementation of this new regime in order to assess what the consequences have been for the economy and whether there are updates to the regime ultimately adopted which would enhance the UK’s competitiveness. The suggestion that these changes will raise £2.7bn can similarly be assessed. Given the potentially very significant behavioural response which is possible in this area, it remains to be seen whether this level of additional revenue can be achieved. HMRC will have records of who the existing non-UK domiciliaries and deemed domiciliaries are so the data can be checked. This is a unique opportunity to test whether there is in fact a behavioural response to changes of this type – it must in our view be taken.  

Although we are approaching a general election and legislative time will be short, we believe that it is important that the detail of these changes is carefully reviewed and that the technical consultation is as extensive as possible. The experience of the 2008 changes and the 2017 changes has been that translating policy into practice in this area has been fraught with difficulty and unintended consequences. This should be avoided if the aim of the transitional provisions of encouraging people to stay in the UK notwithstanding the potentially higher tax cost is to be achieved.

Finally, no one should underestimate the level of complexity in the new legislation when dealing with the transitional provisions. In our view, it would be helpful for the Government to provide a clear signal about certain aspects, so that the principle of the rules may be subject to less debate with HMRC in the future. For example, it should be possible for the Government to make it very clear that the transfer of foreign situs assets to a trust to take advantage of excluded property treatment prior to 6 April 2025 does not amount to tax avoidance as that is what the legislation invites taxpayers to do. This could be included in the legislation to stop unnecessary disputes in the future which undermine the effectiveness of the legislation introduced and risks contributing to uncertainty. Clarity should work both ways.