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The UK's Autumn Budget, delivered on October 30, 2024, by Chancellor Rachel Reeves, introduced significant reforms to the taxation of non-domiciled individuals ("non-doms"). These changes are set to take effect from April 6, 2025, and mark a substantial shift in the UK's approach to taxing foreign income and assets of residents.

Abolition of the Non-Dom Regime

The longstanding non-dom tax regime, which allowed UK residents domiciled elsewhere to pay tax only on UK income and gains, or on foreign income and gains remitted to the UK, will be abolished. In its place, a new residence-based taxation system will be implemented, ensuring that all UK residents are taxed on their worldwide income and gains, irrespective of their domicile status. This change aims to simplify the tax system and promote fairness by ensuring that individuals who make the UK their home contribute equitably to public finances.

Transitional Provisions and Exit Charges

To facilitate the transition, the government has outlined specific provisions:

• Transitional Period: Current non-doms will have a transitional period until April 5, 2025, to adjust their financial affairs in line with the new rules.

• Exit Charges on Trusts: Non-doms who establish or have established offshore trusts will face exit charges if they leave the UK in the 2024-25 or 2025-26 tax years. These charges are designed to prevent the avoidance of UK tax through the use of offshore structures.

Impact on Wealthy Individuals and Private Equity

The abolition of the non-dom regime is expected to have significant implications:

• Increased Tax Liabilities: Wealthy individuals who previously benefited from the remittance basis will now be subject to UK tax on their global income and gains, potentially leading to higher tax bills.

• Private Equity Sector: The budget also introduced an increase in the tax rate on carried interest to a flat rate of 32% starting next spring, rather than aligning with the 45% top income tax rate, as many had feared. This change reflects the government's intent to ensure that private equity professionals contribute a fair share of tax.

Critiques and Concerns

While the reforms aim to enhance fairness, they have sparked debate:

• Potential Talent Exodus: Critics argue that the changes could deter high-net-worth individuals from residing in the UK, potentially leading to a loss of investment and talent. However, government analysis suggests that only a small number of non-doms may choose to leave the country as a result of these reforms.

• Short-Term Relief Measures: The introduction of a four-year 100% relief on foreign income and gains for new residents has been criticized for being too short-term, with concerns that it may transform London into a tax haven similar to the Bahamas.

Summary

The October 2024 UK Budget represents a pivotal moment in the taxation of non-domiciled individuals, shifting towards a more inclusive and residence-based system. While the reforms are intended to promote fairness and increase tax revenues, their long-term impact on the UK's attractiveness to wealthy individuals and investors remains to be seen. Stakeholders are advised to review their tax positions and seek professional advice to navigate the forthcoming changes effectively.