In the recent Budget on 6 March 2024, the Government announced that it intends to abolish the current tax treatment for UK resident, non-domiciled individuals (non-doms) from 6 April 2025. The non-dom regime has been part of the UK’s tax system for more than 200 years, but the Government now believes that the concept of domicile is outdated for a modern tax system as it encouraged individuals to keep income and gains offshore.
New arrivals
The current non-dom regime will be replaced from 6 April 2025 with a new, 4-year, foreign income and gains (FIG) regime. This will apply to individuals who become UK tax resident, after a period of 10 tax years of non-UK residence.
Qualifying individuals will not pay tax on FIG arising in the first 4 tax years, after becoming UK tax resident and will be able to bring these funds to the UK free from any additional charges. They will not pay UK tax on non-resident trust distributions either. They will however pay tax on UK income and gains, as is the case for non-doms now.
Individuals who are currently UK resident & using the remittance basis regime
Non-doms, who on 6 April 2025, have been tax resident in the UK for less than 4 years (after 10 years of non-UK tax residence) will be able to use this new regime for any tax year of UK residence in the remainder of those 4 years.
Those opting into the 4-year FIG regime will lose their entitlement to personal allowances and annual exempt amounts for capital gains tax.
After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents.
Transitional provisions – individuals
The introduction of the 4-year FIG regime will include some transitional provisions for existing non-doms.
Individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new 4-year FIG regime will, for 2025-2026 only, pay tax on 50% of their foreign income. This reduction applies to foreign income only. It does not apply to foreign chargeable gains. For 2026-27 onwards, tax will be due on all worldwide income in the normal way.
For 2025/26 and 2026/27 only, a reduced rate (of 12%) will apply to remittances of pre-6 April 2025 personal FIG. This does not apply to foreign income arising within offshore trust structures.
From 6 April 2027, remittances of pre 6 April 2025 FIG will be taxed at the normal rates. A capital gains tax rebasing of non-UK sited assets (held at 5 April 2019) will be available to those who have historically claimed the remittance basis but cannot benefit from the 4-year FIG regime. The conditions of this have yet to be published but they are likely to be similar to the current regime of choosing the most beneficial calculation for capital gains tax purposes.
Business Investment Relief will continue to be available.
Non-resident Trusts
From 6 April 2025, the protection from taxation on income and gains within settlor-interested trust structures will be removed for those who do not qualify for the 4-year FIG regime. Instead, FIG arising in such settlements will be taxed on the UK resident settlor/transferor on an arising basis. FIG arising pre-6 April 2025 will continue to be matched on a worldwide distribution basis.
Overseas Workday Relief
Overseas workday relief (OWR) for the first 3 years of residence will remain and will be based on whether the individual opts to use the new 4-year FIG regime. If a non-dom is unable to opt into the 4-year FIG then OWR will not be available from 6 April 2025.
The new OWR will provide relief from income tax, whether or not these earnings are brought to the UK. As, under the current rules, the new OWR will not provide relief from National Insurance contributions (NICs), so any NICs liabilities on these earnings will be determined as usual.
Inheritance Tax (IHT)
There is an intention to move away from a domicile-based system to a residence-based system for inheritance tax from 6 April 2025 and there will be a period of consultation ahead of this.
The treatment of non-UK assets that are settled by a non-UK domiciled settlor and become comprised in a settlement prior to 6 April 2025 will not change.
While nothing has been confirmed, HMRC envisage that IHT will be charged on individuals who have been UK resident for 10 years, with the intention to keep individuals within the scope of IHT for 10 years after leaving the UK. As is the case now, UK sited assets will always remain within the scope of UK IHT.
Summary
In summary, these are significant changes to the tax regime for non-doms, and although there is a suggestion that the regime has been simplified, the rules will still produce a variety of scenarios with several layers of complexity. The transitional provisions provide time for some individuals to arrange their affairs before the new rules take effect.
For further information, get in touch with Lucy Orrow or your usual Lambert Chapman contact.
Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.