Changes to the taxation of Non-UK domiciled individuals

On 6 March 2024, the UK Chancellor announced plans to abolish the current UK regime for taxing non-UK domiciled individuals, and to replace it with a new residency based regime.

New arrivals to the UK (who have a period of 10 years consecutive non-UK residence), will benefit from 100 per cent UK tax relief on foreign income and gains for the first four years that they are tax resident here, and there will be transitional arrangement in place for current non-UK domiciled individuals (often referred to as “Non-Doms”).

In this article, we comment on the upcoming changes to the UK’s tax treatment of Non-Doms and consider some of the impacts. 

The End to the UK “Non-Dom” Regime 

The UK Government has published documentation confirming that, from 6 April 2025:

• the current rules for Non-Doms will end; and
• the concept of “domicile” as a relevant connecting factor in the UK tax system will be replaced by a system based on tax residence.

This new approach will radically change the UK tax treatment of the foreign income and capital gains of Non-Doms who are already resident in the UK and other Non-Doms who are non-UK resident and move to the UK in the future.

Liability to inheritance tax (IHT) also depends on domicile status and location of assets. Under the current regime, no inheritance tax is due on non-UK assets of Non-Doms until they have been UK resident for 15 out of the past 20 tax years. The UK Government announced that it will also consult on the best way to move IHT to a residence-based regime. To provide certainty to affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK IHT regime. 

The Current “Non-Dom Regime” and Foreign Income and Gains

An individual who is domiciled and tax resident in the UK, is subject to UK tax on an arising basis on their worldwide income and capital gains. Consequently, they will pay UK income tax (“IT”) on income they earn and receive anywhere in the world and also capital gains tax (“CGT”) on any gains they realise on the disposal of assets located anywhere in the world; they will also pay such IT and CGT regardless of whether or not the income and gains are kept outside the UK.

To attract investment into the UK by wealthy non-UK domiciled individuals, for many decades, the UK has allowed Nom-Doms who are living in the UK and who become UK tax resident, to elect to be taxed on their foreign income and gains on a remittance basis. Broadly speaking (and ignoring special rules concerned “deemed UK domicile”), under the UK’s current tax regime, where a Non-Dom who is UK tax resident elects for remittance basis taxation, they are liable to pay UK IT and CGT on all UK source income and all capital gains they realise in the UK, and they are liable to pay UK IT and CGT on their foreign income and gains only if and when they “remit” such foreign income and gains directly or indirectly into the UK.  Remittance for these purposes includes transferring the foreign income and gains to a UK bank account or using it to pay for services provided in the UK or to meet costs and expenses incurred in the UK.

The New Residency Based Regime

From 6 April 2025, the UK Government will abolish the current Non-Dom regime and replace it with a new residency based regime.

The remittance basis of taxation will be abolished for UK resident Non-Doms from 6 April 2025 and the last year for which a remittance basis claim can be made will be the 2024-25 tax year.

Under the new regime, eligible individuals will not be required to pay UK tax on foreign income and gains for the first four tax years once they become a UK tax resident after a period of 10 years of non-UK tax residency.

In a marked change from the current system, during their first four years of UK tax residency, eligible individuals will not be required to pay UK tax on funds they remit to the UK from elsewhere in the world.

The UK Government has explained that, in assessing the eligibility for this new regime, it will apply the existing Statutory Residence Test rules to determine a person’s tax residence for any one year.

It is important to highlight that treaty residence or non-residence and split years will be ignored, and that if an individual chooses to be taxed under the new four year residence regime, they will lose entitlement to personal allowances and the CGT annual exempt allowance.

Individuals who currently benefit from Non-Dom status will need to consider whether the cost of forfeiting the above-mentioned entitlements is offset by the benefits available under the new regime.

The Government has explained that to benefit from this new rules, eligible individuals will need to submit a claim in each of the tax years they would like the new rules to apply to them.

If an individual leaves the UK temporarily during the four year period, they will still be able to claim under the new regime, so long as they remain eligible for the remaining tax years on their return to the UK. For example, if someone becomes non-UK resident in year 2 and 3 but is UK resident again for year 4, they will be able to benefit from this new regime for year 4.

Individuals who have been a tax resident in the UK on 6 April 2025 for less than four years (after a period of 10 years non-UK tax residence), will be able to claim under the new regime for any remaining years within that four year period.

Overseas Workday Relief

Overseas Workday Relief is a current tax exemption only available to Non-Doms employed in the UK.

The relief works by treating part of the earnings from a UK employment wholly or partly performed abroad as if it were a foreign source of income. If earnings for work performed abroad are not remitted to the UK, then those earnings are not subject to UK tax.

The UK Government has announced that a new Overseas Workday Relief will be introduced which will continue to provide relief to individuals that are employed in the UK but carry out their employment duties overseas (subject to eligibility requirements). This will provide relief on income tax, whether or not those earnings are brought to the UK. However, no relief will be available for National Insurance contributions.

Employees eligible for this relief will be able to claim for the first three tax years of UK residence. Although, employees that leave the UK and re-enter from 2025-26 will not be able to claim relief if they are not eligible for the new four year foreign income and gains regime.

Trust Protections

Starting 6 April 2025, non-UK domiciled and UK deemed domiciled individuals who do not qualify for the new four year foreign income and gains regime will no longer receive protection from taxation on income and gains arising within settlor-interested trust structures.

Settlor-interested trust structures are trusts where the person who decides how the assets in a trust should be used (or their spouse or civil partner) benefits from the trust.

This will mean that income and gains arising from trusts will be taxed on the settlor, following the same principles applied to UK domiciled settlors currently.

This taxation will occur regardless of when the trust was established unless the settlor qualifies for the new four year foreign income and gains regime.

Non-Doms will also lose entitlement to the remittance basis concerning worldwide trust distributions, whilst the alignment of pre-6 April 2025 rules to trust distributions will continue.

Beneficiaries and settlors within the four year foreign income and gains regime will enjoy tax-free benefits from 6 April 2025, regardless of whether these benefits are received within the UK. Nonetheless, these benefits are not matched to trust income and gains and will be subject to certain special rules.

Reduced amount of foreign income subject to tax

Transitional rules will apply to the 2025-26 tax year meaning current Non-Doms that will not be eligible for the new four year foreign income and gains regime will be able to benefit from a one-year reduction in their taxable amount of foreign income.

Specifically, only 50 percent of foreign income arising to such individuals in the tax year 2025-26 will be subject to tax. This reduction:

• exclusively pertains only to foreign income; and
• does not extend to foreign chargeable gains.

Capital Gains Tax rebasing

Individuals who are not eligible for the new four year foreign income and gains regime or cease to qualify for it will be subject to standard taxation on foreign capital gains. Transitional rules will be in place for individuals who have previously claimed the remittance basis and are neither UK domiciled nor UK deemed domiciled by 5 April 2025.

If, on or after 6 April 2025, an individual disposes of a personally held foreign asset that they owned on 5 April 2019, they will have the option to elect for the rebasing of that asset to its value as of 5 April 2019 (specific conditions for this rebasing will be outlined in due course).

Temporary Repatriation Facility

Applying only to tax years 2025-26 and 2026-27, a new 12% tax rate will be implemented for remittances of foreign income and gains made personally by individuals in a year when they were taxed as Non-Doms and are UK residents in the relevant tax year.

To facilitate the use of the Temporary Repatriation Facility, there will be some relaxation of the mixed fund ordering rules. This adjustment aims to simplify the process for individuals, especially those with foreign income and gains in mixed funds or those facing challenges in precisely identifying the amount of their foreign income and gains.

Inheritance Tax

Inheritance Tax (IHT) is currently based on an individual’s domicile. However, the UK Government intends to transition this to a residence-based system. For non-UK property settled by a non-UK domiciled settlor before 6 April 2025, the existing IHT rules will apply.

However, new trusts or additions made by a non-Dom on or after 6 April 2025 will be subject to the new residence-based rules.

Property Owned Outright

IHT for outright-owned assets is determined by the place where an asset is considered to be located for legal purposes (with UK assets subject to IHT) and an individual's domicile or deemed domiciled status at the tax charge date. Various criteria, including residence and former domicile, dictate IHT liability.

If a person is UK domiciled or deemed domiciled, they are liable for IHT on their worldwide assets.

If a person is non-UK domiciled, they are liable for IHT only on UK assets, including UK residential property held through foreign entities.

From 6 April 2025, IHT is envisioned to be applicable to worldwide outright-owned assets when an individual has been a UK resident for 10 years (the "residence criteria"), with a provision extending liability for 10 years post-UK departure.

Property Held in Trust

IHT for assets in a settlement depends on the place where an asset is considered to be located for legal purposes and the domicile of the settlor at the time of inclusion (in the relevant trust).

UK domiciled or deemed domiciled settlors trigger IHT on worldwide assets in a trust, while non-UK domiciled settlors are subject to IHT on UK assets.

For assets in a settlement after 6 April 2025, chargeability will hinge on whether the settlor meets the residence criteria or falls within the "tail" provision during settlement or subsequent charges.

The treatment of UK located assets will remain consistent. The treatment of non-UK assets settled by a non-UK domiciled settlor and included in a settlement before 6 April 2025  will remain unchanged if the asset meets exclusion criteria. However, the treatment of non-UK property in a settlement for a formerly domiciled resident settlor will undergo consultation.

A Final Word of Caution

Our comments in this article are based on press releases and technical notices published by the government immediately after the Budget. Until the government finishes consulting on various aspects of the new regime and publishes the draft legislation, it is not possible to comment definitively on the proposed changes (and our comments should not be construed in any way as tax advice).

We will continue to monitor developments and issue further tax updates as and when the government publishes further guidance and/or draft legislation. 

If you have any questions, or need any assistance on this, or any other tax matters, please contact the team below.