A nomadic lifestyle may have its appeal, but the tax consequences can be challenging. The proposal by the United Kingdom’s Conservative government to scrap the non-domicile tax regime is about to increase those challenges for expats.
The UK will no longer be a tax haven for immigrants if the proposal becomes law.
If the proposal is implemented, UK residents will be subject to tax on all foreign income and capital gains, regardless of their domicile status, from 6 April 2025.
Hugo van Zyl, an international tax and exchange control specialist, advises South Africans not to act immediately.
“Sit back, vote in the South African election, and watch the UK circus unfold. Act once you know which primate tribe won the UK election,” he says.
The election must be held by 28 January 2025.
The non-dom regime
A “non-dom” tax status allows UK tax residents who can cite another country as their real home to pay taxes only on their UK-sourced income and assets, says Michael Kransdorff, the chief executive of the Institute for International Tax and Finance.
“This benefited many South African-born UK tax residents over centuries, who sheltered their offshore earnings and assets from UK taxation. Over the last few years, this tax regime has been seen as increasingly controversial in the UK, raising questions around the fairness of taxation treatment, with foreign-born wealthy individuals not paying their fair share of taxes towards public services.”
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, says Rupert Clarey, director of Stonehage Fleming.
The preferential tax treatment of foreign income and gains will effectively be reduced to four years, whereafter non-doms will have to pay tax on their foreign assets. This will make it less attractive for South Africans to have the UK as a second home.
The proposal includes a four-year tax exemption for people for their first four years of residence in the UK. This includes people already residing in the UK and people moving to the UK. The four-year exemption will also apply to UK-domiciled individuals who return to the UK after a break of at least 10 years.
Clarey adds that the tax proposal is only a proposal, and implementation will depend on whether the Conservative Party is returned to power.
Transferring wealth
South Africans who are contemplating emigrating to the UK need to rethink transferring their South African wealth considering these proposed changes, says Kransdorff.
One reason is that South Africans with retirement annuities are required to wait three years from the date of formally ceasing to be a South African tax resident before they can withdraw the funds from South Africa.
“This gives them a narrow window before the four-year UK tax holiday expires. Waiting too long could result in the lump-sum withdrawn being fully taxable in the UK at tax rates as high at 45%,” says Kransdorff.
South Africans who have been living in the UK must first determine whether they are UK non-domiciled and whether they can claim non-dom benefits, notes Van Zyl.
“If you are deemed domiciled, the changes will have very little impact, unless you held assets in a pre-emigration trust outside the UK. If you became tax resident in the UK during the April 2023 tax year, you may continue to claim the foreign income and gains benefit until the end of the fourth tax year in the UK.”
The timing
Van Zyl says South Africans who will be moving to the UK next year should not act before the outcome of the UK election is known. However, he also advises taxpayers not to wait for the Spring 2025 budget, because it may be too late if the proposal becomes law.
He recommends that South African taxpayers obtain exchange control and tax advice if they plan to leave the Republic, to assist with transferring their South African cash into a UK bank account before leaving this country. He explains that funds arriving in the UK before a South African becomes a tax resident will remain outside the UK’s new tax net.
Van Zyl adds that expats in the UK should seriously reconsider their tax emigration status. “If there is no tax emigration letter on file, undertake the new tax emigration process as soon as possible.”
South Africans should consider making use of the voluntary disclosure programme to get their affairs in order if the tax exit occurred several years ago.
Mathys Briers-Louw, an attorney specialising in exchange control, says UK tax residents with post-emigration income from South Africa can use their foreign investment allowance.
They can transfer R10 million this year and another R10m early next year before the UK tax year ends on 5 April 2025 and the new regime, if it becomes law, is implemented. However, he strongly advises South Africans to obtain UK tax advice on their transfers from South Africa.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
