The headlines read “non-dom status abolished” but what does this actually mean if you are a US person (i.e. US citizen or Green Card holder) and how are you affected?
The biggest change is the abolition of the remittance basis. Alice Pearson’s article gives an overview of the new regime and the old regime that is being replaced.
For US persons living in the UK the remittance basis is not the “holy grail” it is for other non-doms mainly because they are already paying tax on their foreign income and gains in the US. The tax saving is therefore diminished. The remittance basis did provide simpler UK tax reporting and that will be missed. However, whilst some non-doms will find themselves having to collate their worldwide income and gains for the first time, US individuals are very used to this administrative exercise. The difference in tax years is annoying but can be managed.
The holy grail for US persons living in the UK (i.e dual UK/US tax residents) is not paying double tax. For the most part the UK/USA Double Taxation Agreement “the treaty” can resolve this by ensuring the taxpayer can claim a credit for their US tax against their UK tax bill or vice versa.
The treaty also enables an individual to be “treaty” resident in the UK or the US. This concept is usually relevant to individuals who are living in the UK temporarily and will be returning to the US at some stage (which is likely to be the position for many US “non-doms”). If under the tiebreaker you are treaty resident in the US, many sources of income and gains will fall outside the scope of UK tax. This is therefore a very valuable relief and can provide an even better result than the remittance basis because the funds can be brought to the UK without triggering a tax charge.
If you are a US individual currently claiming the remittance basis it would therefore be worthwhile looking at whether you would be considered US treaty resident. The downside of the “treaty route” is that the tax return is more involved and there is a risk HMRC will deny your claim.
The remittance basis was a reliable option and a good back up if a treaty claim was not successful. It was particularly useful for US individuals who found that the treaty did not successfully eliminate double taxation on their income. A common example is profits of LLCs and S-Corporations – these can be subject to tax in both the UK and US without double tax relief because the US and UK differ in their tax treatment. US individuals with these assets could consider restructuring and/or distributing all remaining profits before 5 April 2025 (i.e. the last year of the remittance basis).
Opportunity: Remitting previously “untaxed” funds to the UK
If you have previously claimed the remittance basis and are holdings funds outside the UK which have not been subject to UK tax, it has been confirmed that under the new regime, these can be remitted to the UK in 2025/26 and 2026/27 at a reduced tax rate of 12%.
On the basis these funds have already been taxed in the US, we would expect that the US tax would be available to offset against the UK tax and (potentially) eliminate the UK tax bill completely. It therefore appears US individuals may have a window of opportunity to remit historic untaxed income and gains to the UK without generating a tax charge.
Trusts: Changes from April 2025
William Welch’s article sets out the taxation changes being made to offshore trusts which are settlor interested. US grantor trusts will most likely fall under this category and these trusts should be reviewed to understand the impact from April 2025. Income and gains arising in a grantor trust are usually taxable on the grantor in the US so potentially the UK treatment is now mirroring the US tax treatment.
If US trusts are being exposed to UK tax from April 2025, a review of the assets should be carried out ahead of then to ascertain whether they hold any “non-UK reporting funds”. These offshore funds are generally subject to UK income tax on sale rather than capital gains tax and many US mutual funds fall under this category.
Inheritance Tax
The Budget documents are light on information in terms of the changes to Inheritance Tax other than it will move from being a domicile based regime to a residence based regime. We expect the changes will bring non-doms into the scope of UK Inheritance Tax much earlier and there will be a consultation beginning shortly. UK residential property is of course already within the scope of UK Inheritance Tax.
There is a separate estate tax treaty between the UK and US which eliminates double taxation of an estate. This treaty is very much domiciled based and therefore it will be interesting to see whether they do keep the “deemed domiciled” concept rather than amend the 1979 treaty.
With the US estate tax threshold ($13m) due to sunset 31 December 2025 and with potential changes due to Excluded Property Trusts (see Lisa Spearman’s article) it would be sensible to consider your exposure to estate taxes now to ensure there is time to implement any changes before April 2025.
For personalised insights into non-dom tax status contact Lynsey Lord or any member of our of Private Client Team.
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