Changes to the Taxation of Non-Domiciles in the UK

From April 2025, the current tax system for non-UK domiciled individuals will be abolished. This will be replaced by a residency-based system which will tax individuals on their worldwide income and gains.

Following the initial proposed rules announced by the previous Conservative government in March 2024, and announcements from the new Labour government during the summer, the new rules for UK tax on foreign nationals have now been confirmed in the Autumn Budget on 30 October 2024. The government’s aim by introducing the new residency-based system is to continue to modernise the UK tax system and follows the 2017 domicile reforms which saw the introduction of the deemed domicile rules.

Whilst there is no doubt that the new system will simplify the rather complicated existing remittance basis system, particularly for those individuals where a remittance basis claim involves the analysis of numerous offshore bank accounts, other individuals will be disappointed to learn that foreign income and gains can no longer be sheltered from UK tax under the remittance basis, potentially landing these individuals with higher UK tax liabilities.

The new rules will come into effect from 6 April 2025; transitional rules will apply for non-UK domiciled individuals already living in the UK, who have previously been assessed to tax under the ‘old’ regime.

New arrivals to the UK

From 6 April 2025, new arrivals to the UK who have a period of 10 consecutive years of non-residence will benefit from a 4-year period during which full exemption from UK tax will apply on foreign income and capital gains (“FIG”), even if the funds are remitted to the UK. Following this initial 4-year period, UK resident individuals will be liable to UK tax on their worldwide income and capital gains.

Taxpayers must claim exemption for their FIG in their Self-Assessment tax returns by identifying and quantifying the source of the income and gains for which relief is being claimed. Relief will be given on a source-by-source basis, and FIG which is not quantified and identified will remain taxable at the usual rates applicable to UK income and gains. Similar to the current rules, anyone claiming FIG relief will lose their entitlement to the personal allowance and annual capital gains exemption, as well as the ability to claim relief for foreign capital losses.

HMRC have confirmed that Overseas Workday Relief will still be available under the new system, in a simplified format. Overseas Workday Relief provides income tax relief for earnings from employment duties carried out overseas for the first three tax years of residence – this will now be extended to four years, in line with the FIG regime, but will be limited to 30% of qualifying employment income (and capped at a maximum claim of £300,000). Under the new rules, the restriction on remitting these earnings to the UK will be removed.

UK resident and non-UK domiciled individuals already in the UK

Individuals who are already in the UK who have been tax resident for fewer than 4 tax years will be able to benefit from the new regime until the end of their 4^th year of residence.

Individuals who are already in the UK who have been tax resident for more than 4 tax years will be subject to the following rules:

• For asset disposals taking place after 6 April 2025, foreign assets can potentially be rebased to their value as at 5 April 2017. This will apply to non-UK domiciled individuals who have claimed the remittance basis. In effect, this means that qualifying individuals will only be subject to tax on gains made on assets from 5 April 2017 onwards.
• For foreign income and gains which arose prior to 6 April 2025, individuals will be able to remit these funds to the UK at a reduced rate under the ‘Temporary Repatriation Facility’. This will apply for 2025/26 and 2026/27 at 12%, and 2027/08 at 15%. To qualify for the TRF, taxpayers must ‘designate’ the funds on their tax return for the relevant year.
• Foreign income and gains that arose in protected non-resident trusts prior to 6 April 2025 will not be taxed unless distributions or benefits are paid to UK residents who have been here for more than 4 years. From 6 April 2025, all protections on non-resident trusts from this date will be removed and any foreign income or gains arising from such trusts will be taxable in the UK.

How do the new rules apply to Trusts

• Beneficiaries of non-UK trusts who qualify for the regime should be able to claim FIG relief in relation to trust distributions that they receive.
• The current income tax and capital gains tax protections for non-UK resident trusts will be removed. FIG arising in a settlor-interested trust with a UK resident settlor will be taxed on the settlor, unless the settlor claims FIG relief.
• Benefits from non-UK trusts that would have previously qualified for the remittance basis will generally qualify for FIG relief. But benefits for which the FIG relief is claimed will not be “matched” with FIG in the structure and so will not reduce the income or capital gains pools of that structure.

Inheritance Tax

Under the current tax system, Inheritance Tax (IHT) is payable based on an individual’s domicile status. UK domiciled, or deemed UK domiciled, individuals are subject to IHT on worldwide assets, whereas individuals domiciled overseas are subject to IHT on UK situs assets only. The new changes from April 2025 will also move to a residency-based system, whereby individuals will be treated as if they were UK domiciled for inheritance tax purposes if they have been UK resident for at least 10 of the past 20 years – as compared to the current rule of 15 of the past 20 years. Affected individuals who leave the UK may therefore find themselves remaining within the scope of IHT on worldwide assets for between three and 10 years after leaving the UK. Individuals who leave the UK before 6 April 2025 will remain under the old rules.

How will the changes affect you?

The abolition of the Non-Domicile regime will have a significant impact on individuals’ tax positions over the coming years. For those individuals already in the UK, the transitional period will allow for foreign income and gains to be brought into the UK on a reduced tax rate and we recommend that the position for these individuals is reviewed to fully benefit from these transitional rules. Individuals for whom the non-dom benefits will expire in April 2025 may also need to consider segregating bank accounts offshore in order to separate pre-April 2025 income and gains from post-April 2025 FIG.

Get in Touch

It is never too early to start planning and whilst we await final legislation in respect of the above changes, if you believe these new rules may affect you then do not hesitate to get in touch with Mark Moore (Tax Partner) or Doug Stratton (Private Client Tax Manager) for a preliminary conversation so you can start planning for your tax position.