The decline of domicile and the rise of residence

Practitioners often tell me that they are not particularly interested in non-UK domicile tax issues because they either only deal with UK-domiciled clients or their exposure is limited to self- assessment compliance for income and gains. This may be because the ‘non doms’ who particularly benefit from the UK tax system are higher net worth clients, looked after by larger firms.

There is a risk though that opportunity for UK domiciled clients could be missed if the upcoming changes to tax status are not properly considered, especially in certain tax planning strategies.

The scope of IHT up to now has made a key distinction based on domicile. That distinction determines whether a client is within worldwide scope or not. Changes in domicile status may impact not only on directly owned wealth but trust interests too.

From 6 April 2025 important changes are set to come into force. For IHT, domicile is replaced by the concept of ‘long-term residence’. A long-term resident will be one who has been resident for ten of the preceding 20 tax years. Currently, residence of 15 of the preceding 20 years is needed before a ‘non dom’ is mandatorily within worldwide scope. All practitioners will need to acquire or refresh on what constitutes Residence.

The new rules though also provide opportunity for those who have always lived in the UK to fall out of scope by moving wealth away from the UK. This will generally take ten years, but it provides more certainty of tax treatment than under the current rules. With other proposals on the table which are likely to increase UK IHT bill and many places in the world which do not have IHT or an equivalent, this will be tempting.

But it’s not all about planning... Understanding the new rules also impacts on income and gains and affects your existing non-UK domiciles where you carry out compliance work and new arrivals to the UK. Actions may be needed before this 2024/25 tax year ends to minimise tax bills.