With a view to the termination of the favorable tax regime “res non dom” in the United Kingdom, many high-income individuals are opting for the corresponding regime available in Italy.
In this paper, we examine the consequences of the end of this tax regime in the UK and the opportunities related to joining the res-non-dom regime in Italy.
UK resident non-domiciled tax regime applicable until April 6, 2025
The UK government has announced a significant reform of the tax regime for resident non-domiciled (“non-dom”) individuals, which will come into effect on April 6, 2025. This reform will eliminate the previous system based on domicile status, replacing it with a new tax regime based on residency.
The version of the resident non-domiciled regime in force until April 6, 2025, provided that an individual qualified as a tax resident of the UK but was domiciled abroad. According to the rules, income sourced in the UK was subject to tax in the UK; conversely, income sourced abroad was exempt from taxation unless the individual opted for the remittance basis of taxation. Once income was remitted to the UK, taxation occurred.
Furthermore, non-domiciled individuals in the UK were exempt from the payment of Inheritance Tax (IHT) on assets located abroad; only assets situated within the UK were subject to IHT.
For the sake of clarity, it is worth specifying that tax residency refers to whether an individual is considered a resident of the UK for tax purposes within a given year. It is determined primarily by the Statutory Residence Test, which considers factors such as the number of days spent in the UK, the presence of a permanent home, or the number of “ties” to the UK.
The definition of domicile is broader and relates to an individual’s permanent home or long-term intention to settle. Domicile is usually inherited from one’s father at birth (domicile of origin) unless it is changed at a later time through acquiring a domicile of choice.
By the expression “resident-non domiciled” tax regime, one generally refers to the possibility of establishing civil and tax residency in a country while avoiding paying all or some taxes on the income generated abroad.
Recent abolition of the UK resident non-domiciled tax regime”
Abolition of the non-dom regime:
From April 6, 2025, all UK residents will be taxed on their worldwide income and capital gains, regardless of their domicile status. This marks the end of the previous system, which allowed non-doms to pay tax only on income and gains remitted to the UK.
Exemption scheme for new arrivals:
New UK residents who have not been tax residents in the country for the previous 10 years will be entitled to a full exemption on foreign income and capital gains for their first four years of tax residency. This measure aims to attract international talent and investment.
Changes to inheritance tax (IHT):
The Inheritance Tax system will shift from a domicile-based to a residency-based approach. Individuals will be subject to IHT on foreign assets if they have been UK residents for at least 15 out of the last 20 tax years (long-term UK residents). Additionally, assets transferred into trusts by long-term UK residents will be subject to IHT.
Temporary repatriation facility (TRF):
A temporary mechanism will be introduced, allowing individuals who previously benefited from the non-dom regime to repatriate foreign income and gains accrued before April 6, 2025, at a reduced tax rate of 12% in the first two years and 15% in the third year.
The Italian “res-non-dom” regime – the 200K Lump-Sum tax regime
Now that the UK Government has decided to significantly change the benefits provided by the UK resident non-domiciled regime, the Italian 200K Lump-Sum Tax Regime could become more advantageous for wealthy individuals with significant assets held outside of Italy.
Under this regime, any foreign-sourced income is subject to a flat tax of €200,000, provided that the following conditions are met:
- The individual was not a tax resident of Italy for at least 9 out of the 10 years prior to applying for the regime.
- The individual qualifies as a tax resident of Italy while benefiting from the 200K Lump-Sum Tax Regime.
Why is it more attractive than the current UK resident non-domicile regime?
- The benefits of the Italian 200K Lump-Sum Tax Regime are substantial when compared to the future UK tax treatment, considering that foreign assets are exempt from wealth tax, which is ordinarily applied to tax residents in Italy. Moreover, there is no obligation to disclose foreign investments to Italian tax authorities, as the law waives the requirement to file the RW Form (used for reporting foreign-held assets).
- The foreigner is exempted from Inheritance and gifts on foreign assets while the Italian Lump-Sum Tax Regime is in force.
- The regime can last up to 15 tax years, provided that Italian tax residency is maintained throughout the same period.
Key consideration: capital gains on qualified shareholdings
It is important to note that the Lump-Sum Tax Regime does not cover capital gains from the sale of qualified shareholdings if it occurs within the first five years of applying the regime. In such cases, capital gains tax at a rate of 26% will apply.
However, under certain circumstances, an application for ruling can be filed with Tax Authorities to avoid the taxation of 26%.
This makes the Italian 200K Lump-Sum Tax Regime a compelling option for high-net-worth individuals seeking a favorable tax environment in light of the UK’s recent tax reforms.
To further explore this topic, receive tailored advice, and evaluate any possible future planning, reach out to us:
Alessandro Borsetto – Partner
Paola Lova ([email protected]) – Senior Associate
Enricagiulia Brai ([email protected]) – Associate
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