Insights
By: Rupert Clarey
What the UK non-dom tax changes mean for South Africans residing in the UK
By Rupert Clarey, Director of Stonehage Fleming in the Legal & Tax Advisory division
The UK Budget this year took everyone by surprise by proposing sweeping changes to the non-dom tax regime, doing away with the preferential taxation of the foreign income and capital gains of people who reside in the UK and qualify for non-dom status.
Non-doms are people who live in the UK but are not considered to be living there permanently. Currently, non-dom foreign income and capital gains can be retained tax free outside the UK unless the tax payer has lived in the country for more than 15 years (and as long as they can show they are not living in the UK permanently).
Historically, many South Africans have benefited from the current tax dispensation, living in the UK for years, sometimes decades, while they fulfil international secondments or wait for their children to complete their education.
However, if the Conservatives win the election next year and implement their non-dom tax proposals, non-dom status would be done away with.
Proposals include:
- The abolition of non-dom status and associated tax benefits.
- A four-year tax exemption for people for their first 4 years of residence in the UK, including people already residing in the UK and people moving to the UK.
- The four-year exemption would apply to UK-domiciled individuals who return to the UK after a break of at least 10 years.
- Changes in the treatment of trusts and inheritance taxes.
If implemented on April 6, 2025, this new tax dispensation would have significant implications for South Africans already living in the UK when claiming non-dom status and for those who are planning to move there over the next few years and seeking non-dom status.
What could this potentially mean for existing South Africans who are already non-doms and residing in the UK?
The new tax regime will do away with a 15-year window period during which non-doms would have benefited from tax-free income and gains on their foreign assets.
For those who have recently arrived, they would qualify for part of a four-year transition period during which they could decide whether to bring those assets into the UK or keep them outside the country. Thereafter, they will be taxed according to the prevailing UK tax regulations.
Any trusts established by living UK resident non-doms would no longer provide a shelter from income tax and capital gains tax.
What could this potentially mean for South Africans planning to move to the UK and become non-doms?
The proposed changes would make it less attractive for South Africans for whom tax is a priority in deciding where to live. The preferential tax treatment of foreign income and gains they would have benefited from would reduce from a possible 15-year term to four years, whereafter they would have to pay tax on their foreign assets.
However, for the South Africans who intend to relocate to the UK permanently and who therefore could not avail members of the non-dom regime, the proposed four-year preferential tax period is extremely attractive. It applies without a charge or minimum tax amount and would mean that those people would not be taxed on non-UK income and capital gains (including distributions from non-UK trusts) regardless of whether the money is brought to the UK.
Tax is rarely the sole decision when deciding where to reside globally. Other considerations are cultural compatibility, historical ties and proximity to family living abroad. Thus, the change in non-dom dispensation would likely have little effect on most South Africans already living in or planning to move to in the UK unless they have very significant wealth.
However, those South Africans still wanting to receive the tax benefits conferred to non-doms for a longer period than four years should consider moving to a country that still offers non-dom status, such as Greece and Italy. These countries offer non-dom status and the associated tax benefits at an upfront investment of anything from Euro 100 000 to Euro 500 000.
What should South Africans living in the UK or planning to live there do now?
The proposals in the budget are still just that, proposals, and thus there is uncertainty about what the final framework and details will look like.
The implementation of the Conservative Party’s proposed tax change ultimately depends on whether the Conservative Party is voted into power later this year. Currently, the Labour Party is leading in the polls by a wide margin.
However, if the Labour Party does win the election, it has previously indicated it would also prioritise removing the non-dom tax status, which means whoever is in power will abolish non-dom status in the upcoming years.
Given the uncertainty about what the final legislation will look like, it is still too early to start planning how to respond to these changes in tax status, unless leaving the UK has been decided upon. The picture will become clearer as and when further details come out and, at that time, those affected can begin considering tax mitigation measures to adapt to the new regime.