Latest changes to the UK’s resident non-domiciled tax regime are likely to drive wealthy families to leave the country, but those committed to stay must plan carefully.
New rules on resident non-doms (RND) announced in the UK Budget have created material uncertainty and could end up having counter-intuitive implications for the government.
One of the major consequences of this Budget is that it may increase the exit rate of non-doms leaving the UK for other jurisdictions, while concurrently encouraging short-termism among high net worth investors, attracting individuals to come to the UK to take advantage of tax-free gains on offshore income and assets, only to leave shortly afterwards. This could result in a net loss for the UK Exchequer.
The RND regime, while flawed, functioned, and attracted wealthy individuals to the UK who contributed significantly to tax revenue. Many ended up staying long enough to be deemed domiciled (DDs), meaning they are taxed on a worldwide basis and subject to UK inheritance tax (IHT).
Indeed, in the tax year ending 2023, there were more than 74,000 RNDs in the UK and approximately 9,800 deemed domiciled individuals, with the former contributing £8.9bn ($11.3bn) in direct taxation and DDs generating £3.3bn.
Flight of wealth
The Office for Budget Responsibility (OBR) has predicted that because of these changes, the exit rate of non-doms will increase from 10 per cent to 12 per cent for individuals and 20 per cent to 25 per cent for individuals with trusts. Most of these leavers will be entrepreneurs and ultra-wealthy non-doms who are leaving because their trusts will become subject to IHT and they themselves could have an exposure to IHT for up to 10 years after leaving.
Surprise winners from the Budget are UK expats who previously faced constant uncertainty over being domiciled upon death and subject to UK IHT. Now, with greater clarity, expats who have lived outside the UK for the last 10 consecutive tax years can return from April 2025 and benefit from the Foreign Income and Gains (FIG) regime, allowing them to bring offshore income and gains into the UK tax-free for four years.
This means that people can decide to come to the UK to exit businesses and other structures they hold offshore, pay no tax on those sales and then potentially leave once this benefit expires. They also have a 10-year window in which to be exempt from worldwide IHT.
This new scheme contrasts sharply with tax schemes in other countries that promote longer-term relationships with the state and ongoing tax contributions. For example, under the Italian flat tax regime, available for 15 years, people must commit to at least five years of residence and pay an annual fee of €200,000 if they intend to sell a foreign business without Italian tax applying.
We expect to see growing demand for structures that place more control in the hands of the policyholder and allow them to decide when and where taxes are incurred. These structures include unit-linked life assurance policies that provide a tax shielded environment, protect against tax volatility and enable flexibility in strategies, assets and managers.
Advisers are also turning to structures that help defer taxes on offshore wealth until a chargeable event occurs. These options offer tax deferral benefits similar to those under prior tax regimes, but with the added stability of UK regulatory oversight.
Alternative jurisdictions
The UK has long been considered an attractive destination and world-class place for RNDs and high net worth investors to live, with 2023 seeing nearly 13,000 RND arrivals. However, the Budget may accelerate a shift in this perception. Even before the Budget, a Wealth Migration Report published by Henley & Partners projected the UK would experience the second-highest net outflow of millionaires globally in 2024, surpassed only by China.
In light of the Budget, these predictions now appear conservative. Indeed, the government announced measures that incentivise non-doms to leave the UK sooner. Under the existing rules, non-doms who leave the UK are subject to IHT on their worldwide assets for three years following their departure. The government confirmed that non-doms exiting in the 2025-26 tax year will remain subject to these rules. However, those who stay in the UK beyond this period could face significantly longer IHT exposure.
It is not only non-doms reconsidering UK residency. While they will likely make up a significant portion of leavers in the short term, the increases to Capital Gains Tax, carried interest and taxes on reliefs such as agricultural property relief (APR), business property relief (BPR) and AIM-listed shares (and the spectre of IHT applying to pensions) are also prompting wealthy UK nationals to consider alternative jurisdictions.
Countries offering flat tax regimes for new arrivals such as the UAE, Italy, Switzerland and Greece are becoming increasingly attractive. Furthermore, while the new Temporary Repatriation Facility (TRF) offers a tax rate as low as 12 per cent, it may not be appealing enough to retain those non-doms already planning to leave the UK or who do not intend to stay long-term.
If Treasury revenues are impacted by these outflows and economic growth remains sluggish, pressure on fiscal policy could increase, potentially triggering new tax changes. Without improvements in growth and productivity, the wealth landscape in the UK may continue to face uncertainty and volatility in the years ahead.
The impact of many of these changes can be mitigated with careful planning, but that needs to start now. For those wishing to remain in the UK and navigate the complexities of the new rules, a robust strategy is essential.
Marc Acheson, global wealth specialist, Utmost Wealth Solutions
