A BusinessTech article dated 28 August 2023 noted that “over half a million South Africans now call first-world countries home – which are the United Kingdom (UK), Australia, and Canada. The UK accounts for the lion’s share of these South African emigrants, with 298,000 South African-born citizens living in the country.
According to the UN Department of Economic and Social Affairs’ 2020 International Migrant Stock report, 247,300 South African emigrants were living in the UK – meaning the number of South Africans that have moved to the UK has increased by a substantial 26% or 50,700 since 2020.”
Photos circulating during SA’s May 2024 National and Provincial Elections (NPEs) highlighted the number of South Africans voting in the UK, underscoring how big the SA community is in that country!
As a rule, all of these people would be classified as non-domiciled (non-doms) in the UK and subject to particular tax legislation, which is about to change significantly. Those affected will need to pay close attention to understand the tax effect and the timeframes involved. It is an opportune time to relook and focus on what would need to be done to assist non-doms in organising their affairs considering the pending changes.
What does domiciled and non-domiciled mean?
In the UK, domiciled status refers to individuals whose permanent home is in the UK, typically determined by origin or long-term intent to reside. They are subject to UK taxation on their worldwide income and gains.
Non-domiciled status applies to those individuals whose permanent home is outside the UK, even if they live there. Non-doms can opt to be taxed only on their UK income and gains, plus any foreign income brought into the UK (remittance basis), though this may incur additional charges after long-term UK residence.
The changes
The UK government has announced significant changes to the taxation of non-UK domiciled individuals (non-doms) from 6 April 2025. These reforms aim to replace the current domicile-based system with the focus on tax residency.
Below, we explain the changes and their implications. It is important to take note of the transitional rules that apply.
Key changes to non-dom taxation
- End of the non-dom regime
The traditional non-dom tax regime will be abolished. Currently, non-doms can opt for the remittance basis of taxation, where foreign income and gains are only taxed if brought into the UK. From 2025, this option will be removed, and residency will determine taxation. Residents will generally be taxed on their worldwide income and gains, aligning the UK more closely with other countries that use residency as the primary tax criterion.
- Introduction of a residency-based system
The UK will adopt a system in which individuals’ tax liabilities are based on their residency status as determined by the Statutory Residence Test. Non-doms who have lived in the UK for fewer than four years after a ten-year period of non-residence will benefit from transitional arrangements, including relief on foreign income and gains for up to four years upon becoming UK tax residents.
- Foreign Income and Gains (FIG)
‘Individuals who meet the conditions will not pay tax on FIG arising in the first four tax years after becoming UK tax resident and will be able to remit these funds into the UK free from any additional charges. In addition, they will not pay tax on distributions from non-resident trusts. They will, as currently, pay tax on UK income and gains. …….. Individuals who make a claim for the new regime to apply will lose their entitlement to personal allowances and the capital gains tax annual exempt amount. This is the same as currently for remittance basis users. Individuals who have been tax resident for less than four years on 5 April 2025 (and who were non-resident for a period of ten years before that) can use the new regime while they are UK resident for the remainder of the four-year period.’ (James Quarmby, partner at UK law firm Stephenson Harwood LLP – October 2024)
- Inheritance tax adjustments
Inheritance tax (IHT) rules will also shift toward a residency basis. Currently, IHT on non-UK assets applies only after a non-dom has been a UK resident for some time, i.e. they may not be considered ‘long-term residents’, and IHT will only apply on UK assets. However, moving forward, the UK government plans to simplify this by tying IHT more directly to residency.
‘Long-term residents’ will be subject to IHT on their personally owned non-UK assets. An individual will usually be a long-term resident where they have been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. However, there will be transitional rules for nondomiciled or deemed domiciled individuals who are non-resident in 2025/2026. For those individuals, they will only be long-term resident if they satisfy the existing deemed domicile test, namely whether they have been resident for at least 15 out of the 20 tax years immediately preceding the year of charge and for at least one of the four tax years ending with the relevant tax year. If they return to the UK, the new rules will apply. This means that individuals who are non-UK resident from 6 April 2025 will not be impacted by the longer ‘tail’ provisions described below. This transitional provision will not apply to individuals who are UK-domiciled. …….. There is to be a ‘tail’ provision to keep long-term residents within the scope of IHT after leaving the UK. …… Where a person has been a UK resident for 20 years or more, they will remain in the UK IHT net for ten years after leaving. This is a significant extension of the current domicile-based regime where a person continues to be deemed domiciled for IHT purposes for the first three years of non-residence. As such, they are only subject to IHT on their worldwide estate until the start of their fourth year of non-UK residence. (James Quarmby, Stephenson Harwood LLP – October 2024)
- Transitional measures and reliefs
- Capital gains tax rebasing
If, on or after 6 April 2025, individuals who have claimed the remittance basis and have never been UK-domiciled or UK-deemed domiciled before 5 April 2025 dispose of foreign assets that they personally held at 5 April 2017, they will be able to elect to rebase those assets to their value as at 5 April 2017.’ (James Quarmby, Stephenson Harwood LLP – October 2024)
- Temporary Repatriation Facility (TRF)
A new tax rate of 12% will apply to remittances of foreign income and gains made during the 2025–2026 and 2026–2027 tax years. This temporary rate is intended to incentivise individuals to bring funds into the UK during the transition.
‘The TRF will also be available to settlors or individuals who receive a benefit from an offshore trust structure during these three years. However, there are some qualifications to this’. (James Quarmby, Stephenson Harwood LLP – -October 2024)
- ‘Trusts
From 6 April 2025, IHT will be charged on non-UK assets comprised in a settlement at times when the settlor is a long-term resident. This means that settled non-UK assets will come in and out of charge based on the long-term residence status of the settlor at the time of the charge rather than the status being fixed at the time the property became comprised in the settlement. So if the settlor is a long-term resident in a tax year in which the ten-year anniversary charge occurs, IHT will be charged on all trust assets. Importantly, an exit charge can also arise when there is a subsequent change in the settlor’s residence status. From 6 April 2025, the effect of a settlor ceasing to satisfy the long-term residence test will mean that non-UK property becomes excluded property for IHT purposes, and the new rules provide that an exit charge will arise. This will be at a maximum rate of 6%.’ (James Quarmby, Stephenson Harwood LLP – – October 2024)
Impacts of the changes
- For current non-doms
The reforms will remove many of the tax benefits associated with the current system. Wealthy individuals who previously used the remittance basis to minimise UK tax exposure may face increased tax liabilities on their global income and gains. Planning opportunities such as using offshore trusts will become more restricted, although trusts established before 2025 will retain some protections. - For new residents
The FIG relief will make the UK more attractive to certain international individuals moving to the country, providing tax-free treatment for foreign income and gains for up to four years. However, these benefits are limited compared to the current regime.
This overhaul represents one of the most significant reforms to the UK tax system in decades, with implications for individuals and the broader economy. There may be advantages and disadvantages for South Africans, and obtaining the correct UK tax advice is important.
Please contact Di Haiden if you wish to discuss this further.
