Non-Dom Replacement Raises Prospects for Investors Coming to UK

The UK government recently scrapped the much talked about and complicated “non-dom” regime. Despite the news headlines, its replacement offers several fresh opportunities for those coming to live in the UK for the first time or after a period of 10 years’ absence.

It also means returning British expatriates can now benefit where they haven’t before. This is a key message to communicate to wealthy individuals who are interested in coming to the UK.

For individuals considering relocating to the UK, understanding how they will be taxed in the UK and their interaction with the country they left is very important.

From April 6, anyone coming to the UK after a period of at least 10 consecutive years of non-UK residence is entitled to the Foreign Income and Gains, or FIG, regime in the first four tax years of residence.

This provides an exemption from UK tax on foreign income and gains for the qualifying four-year period. Residence in the UK will be determined by the UK Statutory Residence Test, or SRT, rules.

Four years is a relatively short period of time, but it’s also a reasonable length of time to come for work or establish a new business, and we may see more work secondments to the UK as a result.

After the FIG period ends, an individual will be assessable in the UK on their worldwide income and gains. However, if they have paid tax in another country on the same income and gains, there may be double tax relief if there is a double tax treaty with that other country. These treaties will in general be very important to avoid double taxation.

Relief from double tax can be given in more than one way and depends on the overall facts. The first step is determining which country has primary taxing rights. Generally, if the source is also taxable in the other country, that country might be able to give credit for foreign tax paid in the first country.

It’s also worth exploring whether the individual could be treaty resident in the other country even if they are also resident in the UK under the UK statutory residence test rules. If so, this will exempt their foreign income and gains from UK tax for the qualifying period.

Nevertheless, residence under the statutory residence test will still count as a year of residence in the UK for the purpose of counting towards one of the four years of the FIG regime.

Understanding worldwide sources of income and gains and how they will be treated in the UK is vital to avoid unexpected tax consequences in the UK, and to identify opportunities to arrange an individual’s affairs as tax efficiently as possible taking into consideration all relevant jurisdictions.

For example, if an individual already has a wealth holding structure, they should review how the UK will tax them by reference to it once they are UK resident. It might be desirable to make some changes in advance of arrival to optimize their overall tax efficiency and reduce their exposure to UK tax over the longer term.

The UK tax system has introduced the concept of a long-term resident—defined as an individual who has been resident in the UK in 10 out of 20 years.

If an individual becomes a long-term resident, their foreign assets will potentially come within the scope of UK inheritance tax. In general, the UK charges inheritance tax at 40% on a deceased person’s estate after deduction of available allowances.

There may be protection from inheritance tax exposure if the individual meets relevant conditions of an estate treaty—the agreement to prevent double taxation in another country. However, for many there will be steps to consider in advance of becoming a long-term resident. For example, gifts or other transfers of foreign wealth to remove it from the risk of UK inheritance tax and protect it for the next generation will be an important consideration.

The steps an individual takes need to work in tandem with family objectives about who should hold some of the wealth and for what purpose. The composition of wealth and its holding structure plays a vital part in determining overall tax.

Tax advice in all relevant local jurisdictions is necessary to ensure any steps that are taken are compliant, tax efficient, and give financial protection and flexibility for the next generation and beyond.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Liz Cuthbertson is partner at Mercer & Hole, providing tax planning for UK and non-UK domiciled clients.

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