Overhaul to Non-Domiciled Taxation

With the recent budget reforms announced, the UK government has introduced changes to the taxation of non-domiciled individuals. This overhaul impacts income, gains, and inheritance tax, aiming to tighten regulations and increase tax revenue from foreign residents in the UK. Here’s what you need to know about the changes, who they affect, and how you may need to adjust your tax planning.

What Are the New Rules for Taxing Foreign Income and Gains (FIG)?

Starting April 6, 2025, the UK will scrap the current remittance basis regime for non-domiciled taxpayers. Under the old system, foreign income and gains were taxed only when “remitted” (brought into) the UK. However, with the new residence-based regime, the rules shift:

1. Four-Year Exemption Period: Non-domiciled individuals who haven’t been UK residents for the past ten years may benefit from a four-year exemption on their foreign income and gains. During this period, eligible foreign income won’t be taxed in the UK, simplifying tax obligations for new UK residents.

2. Full Taxation for Long-Term Residents: For individuals previously using the remittance basis who are not eligible for the exemption, the UK will tax foreign income and gains at the same rate as UK-sourced income. This means increased tax liability on worldwide income for those who have been in the UK long-term.

How Does the Temporary Repatriation Facility (TRF) Help?

To smooth the transition, the government is introducing a Temporary Repatriation Facility (TRF). This TRF will provide a limited-time reduced tax rate on foreign income and gains earned before April 6, 2025, under the old rules. Here’s how it works:

• Reduced Tax Rate: Non-domiciled individuals can remit pre-2025 income and gains to the UK at a 12% rate for the 2025/26 and 2026/27 tax years. This rate will then rise to 15% in 2027/28.

• Flexible Remittance Window: Those who elect to use the TRF can decide when to remit these designated amounts to the UK, even beyond the TRF window.

What About Changes to Inheritance Tax?

From April 2025, inheritance tax will shift to a residence-based system for non-domiciled individuals. Here’s what you need to know:

• New 10-Year Residency Rule: Individuals who have been UK residents for at least ten of the previous 20 tax years will face inheritance tax on their worldwide assets. This includes foreign assets that were previously exempt if they remain UK residents.

• Trust Changes: The government is eliminating the “protected trust” status, meaning foreign assets held in a trust may now be subject to inheritance tax, depending on the settlor’s UK residency status.

Will the Rules for Overseas Workday Relief Change?

Yes. The updated overseas workday relief (OWR) rules now extend to four years (up from three), with eligibility for this benefit tied to individuals who qualify for the four-year FIG regime. There’s also a cap on eligible income—set at the lower of £300,000 or 30% of net employment income per year.

Who Will These Changes Affect?

These reforms primarily affect non-domiciled individuals who:

• Remain UK residents by 2025/26 and have been in the UK since at least April 2022.

• Arrive in the UK following the budget announcement but were not UK residents in any of the ten tax years preceding their arrival.

When Will These Changes Come into Effect?

Most reforms, including the new FIG and inheritance tax rules, are scheduled to take effect on April 6, 2025. The government has signaled that additional legislation may follow to address offshore tax and anti-avoidance rules, likely not before the 2026/27 tax year.

What’s the Government’s Goal with These Changes?

These changes aim to simplify the tax system, reduce loopholes, and increase the UK’s tax revenue from non-domiciled individuals, with an estimated gain of £12.7 billion by 2030. Non-domiciled individuals and their advisors will need to review their tax planning to adapt to the new regulations.

How Can You Prepare for These Changes?

Given the complex nature of these reforms, a thorough review of your tax situation is essential. Consider the following steps:

1. Assess Eligibility for the Four-Year Exemption: If you’re newly arriving in the UK or have recently arrived, understanding your eligibility for the four-year FIG exemption is crucial to optimise your tax position.

2. Plan for Remittances: If you’re a remittance basis user, explore using the TRF to remit pre-2025 income and gains at the reduced rate before it increases.

3. Review Inheritance and Trust Structures: Long-term UK residents with trusts should consult an advisor to understand potential inheritance tax implications and adjust their plans accordingly.

With these changes set to reshape the tax landscape for non-domiciled individuals in the UK, consulting a tax advisor is key to navigating this evolving system. Please reach out to our team at The Tax Faculty for expert guidance on how these changes may impact you and to prepare for the upcoming reforms effectively.

Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023

The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.

Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.

Read more about Charles and the award here.

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