Changes to the UK non-dom regime
TaxTalk - April 2024
Read time: 29 mins
In the Spring Budget the Chancellor announced that the remittance basis for non-domiciled individuals will end in April next year. Make sure you’re ready for the new regime.
A new FIG (foreign income and gains) regime based on residence will apply from 6 April 2025. While HMRC’s guidance on the FIG is only high-level at this stage, it provides enough detail to consider its potential impact before the release of the draft legislation. Given the scale of the changes it will be important that affected individuals take early advice.
The Government’s intentions remain unclear regarding the meaning of ‘domicile’ in relation to Inheritance Tax (IHT). At the moment an individual’s or trust’s exposure to IHT on foreign assets is determined by the concept of domicile. We do understand that IHT will follow the FIG regime with a residence-based assessment, but the detail is yet to be released. So long term non-domiciled individuals should seek advice in good time, especially in relation to any trust structures they may have.
Current regime: the remittance basis
Until 5 April 2025, individuals who are UK resident but non-UK domiciled will still have the option to claim the remittance basis of taxation. This means they pay UK tax on their UK sourced income and gains. But they will only pay tax on their foreign income and gains to the extent that they are remitted to the UK.
Anyone who has been resident in 15 out of the previous 20 tax years is deemed domiciled for UK tax purposes and can no longer claim the remittance basis. From this point onwards, they must pay tax in the UK on their worldwide income and gains as they arise. And, at this stage, the individual’s non-UK assets enter the scope of IHT.
So from 6 April 2025, the remittance basis of taxation disappears and we will move instead to a residence based assessment. This brings an end to the concept of domicile, at least where income and gains are concerned. Although the implications for IHT remain unconfirmed at this stage, we provide more detail on current expectations below.
The new FIG regime ultimately aims to bring more certainty to the taxation of foreign income and gains of individuals previously taxed as non-doms.
FIG regime for prospective UK tax residents
The FIG regime will apply to individuals who become UK tax resident after a period of at least 10 consecutive years of non-residence. For the first four years of residence, they will be able to choose to be taxed on the FIG regime. In doing so, they will lose their entitlement to personal allowance and capital gains annual exemption.
Under the new regime, individuals will not be subject to tax on their FIG regardless of whether these funds are brought to the UK. This means they will not have to track the movement of their FIG to the UK in the way required by the current remittance basis regime. In many ways, the FIG regime will operate like a simple version of the remittance basis.
After these four years, the individual will be subject to tax on their worldwide income and gains.
An individual’s residence will be determined as previously, using the Statutory Residence Test.
As with the current regime, overseas workday relief (OWR) will be available for individuals for the first three years of UK residence. But from 6 April 2025 OWR will provide Income Tax relief on earnings relating to work performed abroad, regardless of whether those earnings are brought to the UK or remain offshore.
FIG regime for existing UK tax residents
Shorter-term residents:
Existing remittance basis users who are yet to complete four full tax years of residence can also benefit from the FIG regime. This will rely on them having been non-UK resident for 10 years before their arrival. For example, if an individual is UK resident for the tax years 2023/24 and 2024/25, they will have been resident for two tax years and therefore will benefit from two years of taxation under the FIG regime for 2025/26 and 2026/27.
Longer-term residents:
Existing remittance basis users who don’t qualify for the FIG regime will be charged to tax in the UK on their worldwide income and gains arising from 6 April 2025.
Protections from tax on settlor-interested trust structures will also no longer be available for those who do not qualify for the FIG regime. This means that FIG arising in the trust (whenever established) from 6 April 2025 will be taxed on the settlor.
Transitional relief provisions:
Knowing that the reforms will hit current remittance basis users the hardest, HMRC is introducing certain transitional reliefs:
- Existing remittance basis users who have been resident for a period of longer than four years can receive tax relief for the first year of the new regime. For 2025/26, such individuals will only be subject to tax on 50% of their foreign income earned during the year. But capital gains will be subject to tax entirely.
- Those who have claimed the remittance basis and are neither UK domiciled nor deemed UK domiciled by April 2025 will benefit from a revaluation of their assets for CGT purposes. This would be a rebasing of the assets to their 5 April 2019 value, provided the assets were held at this date.
- Individuals will be able to elect a reduced tax rate of 12% on the remittance of FIG arising before 5 April 2025 which were protected by the remittance basis. This rate will apply provided the remittances are made in either 2025/26 or 2026/27, but the relief is lost if the remittances are made after 5 April 2027. It will not apply to pre-6 April 2025 FIG generated within trusts and trust structures.
Inheritance Tax
As mentioned, an individual’s charge to IHT is currently based on the concept of domicile. Although not yet confirmed, the Government envisages a move towards a residence-based system from 6 April 2025.
Property held personally:
Though still under consultation, the initial discussions suggest that individuals who have been UK resident for more than 10 years will be subject to UK IHT on their worldwide assets. A proposed ‘tail provision’ would see them remain under the scope of UK IHT for the 10 years after leaving the UK.
Property held in trust:
As with property held personally, the intention is to use the 10-year residence assessment for assets held in trust. The trust will be subject to IHT if the settlor meets the residence assessment at the creation of the trust, at the point of the trust’s 10-year anniversary or where there is an exit charge event.
It’s likely that the treatment of non-UK assets settled by a non-UK domiciled individual before 6 April 2025, will not change. This means that non-domiciled individuals who come within the scope of the new regime may have an opportunity to keep assets free of IHT.
What should you do next?
At time of publishing, we await further details of the proposed legislation.
Existing and prospective UK residents should use the time between now and 6 April 2025 to acquaint themselves with the new regime. Conversations should start as soon as possible to find out about tax planning opportunities and prepare for residence without domicile.
If you would like further guidance on any of the issues raised in this article, please contact Lewis Clarke.