Following Jeremy Hunt’s announcement in the March Budget that the current “non-dom” tax regime will be abolished, we take a look at the current rules which apply to non-domiciled individuals and the new regime which is due to take effect from April 2025.
What is ‘Domicile’ and who is affected?
Domicile is a separate concept to both residence and citizenship. There are four types of domicile which can apply, though only one can be applied at a time:
- Domicile of origin- most people will have a domicile of origin which will come from their father at birth (or their mother if their parents are not married).
- Domicile of dependence – domicile of dependence applies to minors and they will follow the domicile of their parent/guardian.
- Domicile of choice – domicile of origin/dependency can be displaced by a domicile of choice where a person cuts ties with their previous country of domicile and settles permanently in another country without any intention to leave at a future point.
- Deemed domicile – a person can also become UK deemed domicile for UK tax purposes if they have been UK resident for 15 out of the previous 20 years (or potentially after a shorter period for those born in the UK.)
Why is Domicile important? And what are the current rules?
Special tax rules apply to people who aren’t UK-domiciled or deemed domiciled:
Remittance Basis
This means that the person will be liable to UK tax on their foreign income and gains, but only to the extent that they are remitted (bought into the UK). Therefore, overseas income and gains are not liable to UK income tax and capital gains tax if they are kept overseas and not brought into the UK.
This can include income from employment duties carried on outside the UK in the first three years (known as Overseas Workday Relief.) Tax charges apply on claiming the remittance basis after 7 years of residence.
UK resident and domiciled individuals are taxed on their worldwide income and gains.
Inheritance tax (IHT)
Non-UK domiciled individuals are only subject to UK IHT on their UK assets, rather than their worldwide estate which is the case for those UK domiciled or deemed domiciled.
Summary of new rules – for individuals
- A new system for foreign income and gains will be introduced for individuals moving to the UK (known as the 4-year FIG regime). This will provide a four-year window during which foreign income and gains are not subject to UK tax and can be remitted to the UK without charge. This is provided that they have been non-UK resident for 10 years prior to their arrival to the UK. Existing tax residents who have not yet been UK resident for four years may also benefit from this new scheme, again provided they were non-resident for 10 years beforehand.
- For those with employment duties abroad, Overseas Workday Relief can apply for the first 3 years of UK residence for those in the 4-year FIG regime.
- After four years of UK tax residence individuals will pay UK tax based on normal UK tax rules (i.e. subject to UK tax on their worldwide income and gains).
- A temporary repatriation facility which will cover the 2025/26 and 2026/27 tax years. This will enable individuals to remit historic foreign income and gains at a reduced rate of tax of just 12%. This will be of significant benefit to many who might otherwise have incurred tax at up to 45% (48% in Scotland) when bringing historic foreign income and gains to the UK.
- Individuals who are not UK domiciled or deemed UK domiciled on 5 April 2025 may elect for foreign assets to be rebased to their value on 5 April 2019 for disposals taking place from 6 April 2025, providing they were owned on 5 April 2019.
- A relief whereby only 50% of the foreign income (not gains) arising in the 2025/26 tax year will be subject to UK tax. This will be available for individuals from whom the remittance basis of taxation has been withdrawn and who are not eligible for the four year exemption because, for example, they have already been UK resident for more than four years.
- HMRC is also to consult on a reform of the IHT regime applying to non-UK domiciled individuals, with the intention to transition IHT to a residence-based system. The proposal is that an individual’s worldwide assets will fall within the charge of IHT after ten years of UK residence. A further provision will mean individuals remain subject to IHT on worldwide assets for 10 years after ceasing to be UK resident. Whilst this gives individuals more certainty about when they are subject to UK IHT, it could also bring a significant number of people into the UK IHT net who previously were not.
Summary of new rules – for offshore trusts
The changes announced to the UK non-dom regime will also have an impact on offshore trusts which have been established by non-domiciled individuals. Here’s a a high-level overview of the key announcements:
- Income and gains from settlor-interested trusts will now be taxed on the settlor regardless of their domicile status (unless they are in the first 4 years of UK residence and qualify for the FIG regime.)
- Unlike for individuals, foreign income and gains arising within a trust cannot benefit from the temporary repatriation facility. There is no election to rebase capital assets which are held by a trust on 5 April 2019.
- Foreign assets settled into an offshore trust by non-UK domiciled individuals prior to 6 April 2025 will retain their ‘excluded property’ status and will not fall within the scope of the new IHT regime.
- For assets settled after 6 April 2025 into an offshore trust, it is currently suggested that the IHT position of the assets will depend on whether the settlor meets the IHT residence criteria.
Need further assistance?
Given the wide ranging of the changes, there is a small window of opportunity for individuals who are affected by these changes to review their position and ensure that their affairs are structured correctly, and the relevant claims and elections are made to take advantage of the transitional provisions which are due to come into effect.
If you think that you may be affected by these rules, please get in contact with our personal tax specialists, who will be very happy to discuss your position in further detail and set out how we could be able to help you.
