In the recent Budget, chancellor Jeremy Hunt announced significant changes in the UK’s taxation of UK resident non-domiciled individuals, often referred to as “non-doms”.
Non-UK domiciled individuals are those who live in the UK but pay tax in a different country outside of the UK where they also have a permanent residence.
The current taxation regime for non-doms will be abolished, making way for a new residency-based system described as “modern, simpler, and fairer.”
What changes are planned?
When the current non-domiciled residents’ rules are abolished on 6th April 2025, several new regulations surrounding income and capital gains tax will come into place. There will also be changes to inheritance tax
We summarise the planned changes, below. More information can be found on the HMRC website, HERE.
New four-year foreign income and gains (FIG) regime
Starting from April 6th, 2025, the existing remittance basis of taxation for UK resident non-doms will be replaced with a new four-year regime for foreign income and gains (FIG).
Under this new regime, individuals who become UK tax residents after ten tax years of non-UK residence won’t pay tax on FIG for the first four tax years upon becoming UK tax residents. Additionally, they will be able to bring these funds into the UK without facing additional charges. However, they’ll still be taxed on UK income and gains.
Those who claim under the new regime will lose entitlement to personal allowances and the capital gains tax annual exempt amount, similar to current rules for remittance basis users.
Tax residence will be determined using the Statutory Residence Test, disregarding treaty residence or non-residence, and split years. Individuals must make a claim for each year they want to apply the four-year FIG regime on their Self-Assessment tax return.
There will be a one-year reduction in the amount of foreign income subject to tax for individuals transitioning from the remittance basis to the arising basis from April 6th, 2025, who aren’t eligible for the four-year FIG regime. The reduction will mean that only 50% of the foreign income earned in the 2025-26 tax year will be subject to tax. This reduction will apply for one year only and will not apply to foreign chargeable gains.
Overseas Workday Relief
Overseas Workday Relief (OWR) is a tax relief that is currently applicable to income earned outside of the UK by non-UK domiciled individuals. These earnings are not currently taxed by HMRC.
From April 6th 2025, OWR will continue to be available for those who opt to use the new 4-year FIG regime. OWR will then be available for the first 3 years of UK tax residence and will provide tax relief whether or not earnings are bought into the UK.
OWR will not provide relief from any National Insurance Contributions (NICs) liabilities; these will continue to be charged as usual.
Trust Protections
From April 6th 2025, income and gains arising within settlor-interested trust structures will no longer be protected for non-doms who do not qualify for the new 4-year FIG regime. Any FIG arising within the trust, whenever it was established, will now be taxed on the same basis as UK domiciled settlors, unless the settlor is eligible for the new FIG regime.
Any beneficiaries and settlors who are within the 4-year FIG regime will be able to receive benefits free from any tax charges whether the benefits are received in the UK or not. However, these benefits are not matched to trust income and gains and, as such, would be subject to a modified onwards gift rule.
Ending the existing income tax and capital tax regime
The tax year 2024/25 will be the last for making remittance basis claims. After April 6th, 2025, individuals not eligible for the new four-year FIG regime will be taxed on foreign income and gains as usual. Any FIG remitted to the UK after April 6th, 2025, will be taxed for remittance basis users.
Transitional provisions include Capital Gains Tax rebasing and a Temporary Repatriation Facility (TRF) for encouraging non-doms to bring overseas wealth to the UK.
Capital Gains Tax rebasing
From April 6th 2025, and individual who is not, or who ceases to be, eligible for the 4-year FIG regime will be taxed on foreign gains in the current way.
If, after April 5th, 2025, a non-dom sells a foreign asset they have personally owned since April 5th, 2019, they can choose to calculate the asset’s value based on what it was worth on April 5th, 2019. There will be certain conditions for this calculation which will be set out later.
Temporary Repatriation Facility (TRF)
A new tax rate of 12% will apply to money brought into the UK from FIG in the tax years 2025-26 and 2026-27. This applies if the FIG came directly to the person during a year when they were taxed on the remittance basis, and if they are a UK resident in that tax year.
There will be some easing of the mixed fund ordering rules. This change is to help people benefit from the new tax rate, especially if they have money from different sources mixed together or if they can’t precisely figure out how much of their money comes from foreign income and gains.
Starting in the tax year 2027-28, money brought into the UK from foreign income and gains earned before April 6th, 2025, will be taxed at the regular tax rates.
Inheritance Tax
Currently, if someone is either UK domiciled or considered as such, they’ll have to pay IHT on all their assets worldwide, with some exemptions and reliefs possibly applying. However, if someone has non-dom status, they’re usually only liable for IHT on property located within the UK. There are exceptions though, which can bring certain assets outside the UK into the scope of IHT if they’re connected to UK residential property.
Starting from April 6th, 2025, the government plans to switch from this domicile-based system to one based on residence. The details of this change are yet to be confirmed, but the general proposal is that if someone has been living in the UK for ten years, they’ll be subject to IHT on all their personally owned assets worldwide.
Additionally, there’s expected to be a provision which will keep individuals under the scope of UK IHT for ten years after they leave the UK, extending the current rule where someone is considered domiciled for IHT purposes for the first three years after leaving the UK.
Properties held in Trust
For property already placed in trust by a non-UK domiciled individual before April 6th, 2025, the existing IHT treatment will continue.
However, trusts established on or after April 6th, 2025, by non-UK domiciled individuals will be subject to the new residence-based rules.
The exact taxation of trust assets will differ based on the individual circumstances. We would be happy to discuss how this may affect you.
These new non-dom rules will mean a significant change the UK’s tax landscape. If you’re unsure if you will be affected by these changes, don’t hesitate to contact the ZLA Accounting team on 01905 777600, or drop us a line on hello@orfung.co.uk.