What’s changing for non-UK domiciled individuals?

Introduction

In a strategic move aimed at offering a fair and globally competitive tax environment to attract skilled individuals and crucial investments for economic UK growth, the government has announced plans to update its tax system for non-UK domiciled individuals. Set to take effect from April 2025, these changes aim to phase out the current concept of domicile.

Under the proposed changes, the existing rules concerning non-UK domiciled individuals (known as ‘non-doms’), will be replaced by a new residence-based taxation system. Domicile is a British concept and is not recognised by most of the rest of the world. For example, French, German & US tax systems operate by taxing residents in their country, this is without any regard to their nationality or ‘domicile’.

Individuals arriving in the UK will enjoy 100% tax relief on foreign income and gains for their first four years of UK tax residence, with special transitional arrangements in place for current non-doms.

Individuals who have been tax residents in the UK for more than four years will be required to pay UK tax on all foreign income and gains, aligning them with other UK tax residents.

Key Changes to the 'Non-Dom' scheme

Non-domiciled individuals can currently benefit from favourable tax treatment, under the remittance basis. The remittance basis enables individuals to exclude foreign income and gains from the scope of UK tax, on the assumption that this is paid and retained offshore.

The upcoming changes will eliminate this favourable tax treatment, which HMRC claims will be simpler and fairer. From April 2025 onwards, the remittance basis for non-doms will be abolished.

Under the new system, ‘arrivers’ with ten consecutive years of non-residence will receive full tax relief on foreign income and gains (FIG) during their first four years of UK tax residence. Similarly, current eligible UK tax residents will benefit from relief until their fourth year of tax residence.

In addition to this, non-doms currently taxed under the remittance basis will still qualify for Overseas Workday Relief (OWR) during their first three years of UK tax residence. HMRC have advised that OWR will be simplified under the new rules.

Transitioning period

Considering that these updates entail a significant shift for existing non-domiciled individuals affected, HMRC are introducing transitional measures for certain individuals.  These include:

• A temporary 50% reduction in the tax they owe on their personal foreign income for non-domiciled individuals who will no longer have access to the remittance basis starting from April 6, 2025, and do not qualify for the new 4-year FIG exemption scheme in the 2025-26 UK tax year.
• If non-domiciled individuals sell their foreign assets after 6 April 2025, they can calculate the tax they owe based on the value of those assets as of 5 April  2019.
• Non-domiciled individuals can bring back foreign income and profits earned before 6 April 2025, to the UK at a tax rate of 12% during the UK tax years 2025-26 and 2026-27 using a new facility called Temporary Repatriation Facility.
• The government will remove protections on trusts that hold foreign income and gains generated after 6 April 2025. Income and gains from trusts set up before this date won't be taxed unless they're given to UK residents who've been in the country for more than 4 years.

What about inheritance tax?

The current inheritance tax rules are based on whether you’re UK-domiciled and where your assets are located. The proposed inheritance tax changes are not yet finalised, but we understand that the aim is for property considered excluded and incorporated into a settlement before 6 April 2025, will remain excluded property. It seems the intention is for individually held property, previously categorised as excluded, will become subject to UK inheritance tax if the individual meets the relevant residence criteria (10 years in the UK). There has not yet been any mention of transitional relief concerning the new rules.

In Summary

The new set of rules involve significant changes and we haven’t seen updates in this area since HMRC’s update on deemed domicile in 2017.

Next Steps

If you require any support or guidance in relation to the new rules, please do let us know, and we would be happy to help. Please contact us here.