Labour’s proposals for Non Doms and what it means for our US taxpayer clients

There has been a lot in the press and articles written by practitioners about how Labour proposes to modify the tax treatment for individuals resident but not domiciled in the UK.  However, there has been little discussion around what this means for US taxpayers who are within the UK tax net.

Life is already complicated for US citizens or Greencard holders living in the UK, who face navigating worldwide taxation in the US and an ever-changing and complex tax position in the UK. So, what are the proposals, and how will they impact our UK resident taxpayers?What do we know in relation to the proposals for income and capital gains tax?

• There will be a new regime for Foreign Income and Gains (FIG):  Currently, US taxpayers who are not domiciled in the UK can elect to pay tax on the remittance basis for the first 15 years of residence.  In the first 7 years, there is no specific charge, but thereafter taxpayers must pay a remittance basis charge to retain the benefit.  After 15 years, US taxpayers pay UK tax on their worldwide income in both the US and the UK, with all the associated challenges.  Under this new FIG regime, in the first 4 years, there will be no UK tax on foreign income or gains, whether remitted or not.  Currently, if the remittance basis is chosen, the unremitted income and gains cannot be remitted to the UK without incurring a tax charge. To be eligible for this new regime, an individual must not have been UK tax resident in any of the 10 tax years preceding the four-year period.
• There will be some form or rebasing of assets for UK capital gains tax purposes.  The date of rebasing has not yet been announced, and it is not clear precisely which taxpayers will benefit. There are indications that it will be for current and past remittance basis users.
• There will be a temporary repatriation facility (TRF), which will allow previous remittance basis users to remit income and gains realized prior to 5 April 2025 to the UK in 2025/26 and 2026/27 at a likely flat rate of 12%, although this rate and the exact length of time the TRF will be available for are to be confirmed.

What does this mean for our US taxpaying clients?

• For many UK resident US taxpayers, there is and has never been any significant benefit electing for the remittance basis, simply because US taxpayers pay US tax on worldwide income and gains in any event.  However, for many, they get caught out holding assets that are inappropriate for UK tax purposes.  Perhaps US mutual funds, some of which suffer a particularly harsh rate of tax in the UK.  Maybe structures that don’t work particularly well in the UK, such as LLC’s or trusts. Or it could be as simple as wanting to liquidate assets to buy a UK residence and getting caught out with exchange rate issues.  Regardless of the reason, many of our clients arrive in the UK and then take advice, by which time it’s often too late.  This new law potentially gives newly resident taxpayers a four-year window to optimize their assets from a UK tax point of view without undue UK tax consequences.
• Rebasing of assets may bring some relief for our US clients.  There will be no rebasing in the US.  But in the UK, clients often get caught out in two specific areas:
  • Selling US mutual funds that are not ‘qualified’ in the UK.  The US rate will be 23.8%, but the UK rate will be up to 45% with no offset for corresponding losses.
  • Movement in exchange rates.  A client buys stock for $100 when the US/UK exchange rate is 2:1. Their ‘cost’ is £50.  They sell for $100 when the US/UK exchange rate is 1:1. Their proceeds are $100.  So, no gain/no loss in the US, with a £50 taxable gain in the UK. A disastrous result.This rebasing may provide some welcome relief for our clients to enable them to reorganise their investments, particularly where assets have been held long-term and stand at a significant gain, mitigating the potential UK tax due.
• Many clients who opt for the remittance basis do so thinking that they will never need the funds in the UK.  But very often, life plans change, and clients are looking for a way to bring funds to the UK tax efficiently. The TRF will give clients an opportunity to do just that.  It won’t be free, and it’s unlikely that they will get the benefit of any workable credit against US taxes.  But it’s a lot cheaper than it would be under current rules.  For example, assume a client had sold US mutual funds that are not “qualified” in the UK five years ago, paying the appropriate US capital gains tax of 23.8% and claiming the remittance basis in the UK, so no UK tax. Five years later, they want to remit those funds to the UK to buy a house.  The likely UK tax (ignoring exchange rate issues) would be potentially 45%.  So a total of 68.5% tax.  Under this new regime, it could be a more palatable 35.8%.

What do we know in relation to proposals for domicile and inheritance tax? 

• The new rules will have the UK move from a domicile-based test to a residence-based test for inheritance tax.
• The government has announced that the basis test for whether non-UK assets are in scope for inheritance tax from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with provision to keep a person in scope for 10 years after leaving the UK. The government has also said that they will engage with stakeholders.
• UK assets are currently already within the UK inheritance tax net, so we are only considering non-UK assets for these purposes.
• Once a taxpayer has been in the UK for 10 years, it’s likely that their worldwide estate will be within the inheritance tax net, subject to any nuances that are brought in as part of any review.
• To escape the ‘net’ by leaving the UK, taxpayers will need to have been non-resident for 10 years.

What does this mean for our US domiciled clients? 

• The inheritance tax rules relating to domicile have changed significantly in recent years, with non-domiciled clients becoming deemed domicile after 15 years.  Many taxpayers would look to leave the UK prior to their 15 years.  If they return to the UK at some point in the future after a minimum of five years, they might expect that the domicile clock will be ‘reset’.   There has always been a significant health warning around this, particularly where a return is planned, as HMRC may argue that the client is simply ‘domiciled’ in the UK under common law in any event.
• Now, although they will be within the net much earlier, we are likely to have more certainty.  Clients will know that they can leave and return, but will need to have 10 years of non-residence or their non-UK assets will remain within the UK inheritance tax net.
• We can expect that there will be more cause to turn to the US/UK estate tax treaty to decide who has the ‘right’ to tax the estate and on what assets.  For non-UK citizens, this is likely to provide welcome relief; however, for UK citizens, the treaty is likely to be much more difficult to navigate. This may create delays in estate tax liabilities being settled.
• Many of our clients might expect that their estates would not suffer tax in the US given the currently high US estate tax exemption of $13,610,000 (although this is set to reduce from January 1, 2026).  So, we might see clients taking out what could be relatively inexpensive term insurance to cover the potential UK inheritance tax for the duration of the 10-year tail if they are planning to leave the UK.

What do we know in relation to proposals for trusts?

• Currently, excluded property trusts or trusts established by non-domiciled individuals can benefit from exemption from inheritance tax, provided they only hold assets sited outside the UK.  The government proposes to remove this protection from inheritance tax.
• For settlor-interested trusts, under the current regime, in many cases the income and gains within the trust are not immediately subject to UK tax on the settlor but will often remain subject to US tax as the income and gains arise.  Under the new rules, with some exceptions, we expect the income and gains to be taxed to the settlor, akin to a US grantor trust.
• We don’t yet know how it will impact deceased settlors or excluded settlors.  There is speculation that there may be some transitional rules or grandfathering of existing trusts, nor do we know what charges may apply in unwinding a trust.  So, we are very short on detail.

What does it mean for our US domiciled clients? 

• It’s very common for US domiciled individuals to make use of trusts for a variety of reasons.  Often, it’s as simple as wishing to avoid probate issues (very common in California, for example).
• Many of our clients are currently paying US tax on the income and gains in their trusts but are not subject to UK tax, so it’s an effective planning tool both for income tax and inheritance tax if the client does not and will not need access to the underlying assets. But this will likely change.
• All trusts set up by our US clients will need to be reviewed once we get the final rules.  Some trusts may need to be unwound or revised, and we don’t yet know what if any transitional arrangements there will be.
• Many trusts that have historically not been subject to UK tax may now come within the UK tax net and will likely need to be registered with HMRC.
• Potentially the most damning and punitive change would be the removal of inheritance tax protection of trusts. In essence, this could result in trusts being exposed to periodic charges during the lifetime of the trust and a 40% charge on the death of the settlor, depending on the terms of the trust. The US/UK estate tax treaty may provide relief, and so we anticipate those impacted looking to explore whether accessing relief under the US/UK estate tax treaty is viable.
• We have to hope that the rules, when finally published, will be clear and give enough time for clients to sort their affairs out without causing undue hardship.  What is clear is that trust advisors will be busy, so clients should not leave it too late to seek advice.

Conclusion 

The changes that will come in with the Autumn statement will be far-reaching and wide-ranging; the devil will certainly be in the detail.  They will affect almost all our US clients who are or have been non domiciled in the UK and have at some point taken advantage of that status. We will know more after the Autumn statement. Maybe some of our clients will choose to leave the UK, in which case navigating the complex UK residence rules will be a must.

If you want to discuss your own position, please do get in touch via our contacts page, or if you are already a client, reach out to your regular team.