- Background
From 6 April 2025, the current remittance basis of taxation for non-UK domiciled individuals or non-doms is due to come to an end. The concept of domicile in the tax system will be replaced by a new 4 year residence-based regime. Transitional rules have also been announced for existing non-doms and trusts.
- What is the New Regime?
Based on the existing policy papers issued to date, the following measures have been announced:
- The current remittance basis of taxation will be abolished for UK resident non-domiciled individuals (RNDs) and replaced from 6 April 2025 with a new four year foreign income and gains (FIG) regime. Under the current non-dom regime, RNDs are able to claim the remittance basis of taxation. This shelters the RND’s non-UK income and gains from UK income and CGT, provided that such income and gains are not “remitted” to the UK. Once a RND has been resident for at least 15 out of the previous 20 tax years they are “deemed domiciled” in the UK and no longer eligible for the remittance basis of taxation.
- Under the new FIG regime, provided the individual qualifies (see below) they will not be subject to UK tax on their foreign income and gains, or on distributions or benefits received from non-UK resident trusts (though subject to a modified onward gift rule) and such funds will be able to be transferred to the UK without UK tax consequences.
- Overseas Work Day Relief (OWR) for those employees who perform duties outside the UK will continue to be available for the first 3 tax years of UK residence (but not for all 4 years of the new FIG regime). In contrast to the current rules, from 6 April 2025 onwards, OWR is intended to provide relief from Income Tax on earnings relating to work performed outside the UK regardless of whether those earnings are remitted to the UK or kept abroad.
- Who is eligible for the new FIG Regime?
The new FIG regime is only available to individuals arriving in the UK who make a claim under the regime for their first four years’ tax residence, provided this comes after a period of at least 10 tax years of non-residence. This is intended to apply regardless of their domicile status under general law.
The existing statutory residence test (SRT) will be used to determine UK tax residency. It should be noted that residence status determined by reference to a tax treaty between the UK and a foreign jurisdiction will be ignored for these purposes. Split year treatment under the SRT will also be disregarded.
Claims to use this new FIG regime will need to be made for each year it is to apply. There will be no annual charge to claim the new basis of assessment to tax, but entitlement to personal allowances and the CGT annual exemption will be lost as a result of being subject to tax under the FIG regime (in keeping with the current remittance basis rules).
Individuals who do not qualify for the FIG regime will be taxed on a worldwide arising basis.
- How will existing Non-Doms be treated?
Targeted transitional arrangements for existing non-doms have been announced and include the following:
- a 50% reduction to tax on foreign income in 2025-2026
RNDs who lose access to the remittance basis of taxation to the arising basis on 6 April 2025 (and who are not eligible under the FIG regime) will be liable to tax on 50% of their foreign income (for the 2025 – 2026 tax year only). NB: this will not apply to foreign gains.
- Rebasing
Individuals who have previously claimed the remittance basis of taxation (and are neither UK domiciled nor deemed domiciled by 6 April 2025) will be able to elect to rebase assets held personally to their value at 5 April 2019 for disposals on or after 6 April 2025. This is a similar provision to that introduced in 2017 which allowed a RND who became deemed UK domiciled as a result of the 2017 reforms to automatically rebase any personally held non-UK assets to their value on 5 April 2017.
- Temporary Repatriation Facility (TRF)
RNDs who have been taxed on the remittance basis will be able to elect to remit foreign income and gains that arise before 6 April 2025 to the UK at a reduced rate of 12% in the tax years 2025 – 2026 and 2026 – 2027. Remittances of such income and gains made in subsequent years will be taxed at the usual rates (see below).
This is clearly an incentive for RNDs to bring income and gains into the UK at the earliest opportunity. The TRF will not, however, apply to income and gains matched with benefits received from non-UK resident trusts.
Any foreign income and gains which arise prior to 6 April 2025 in non-UK resident trusts that had protected trust status will not be taxed unless matched with distributions or benefits paid to individuals who have been UK resident for more than four years.
- Tax Treatment of Assets held in Trust
Under current rules, non-UK resident trusts established by RNDs before they become deemed domiciled in the UK benefit from protected settlement status following changes to the non-dom regime in 2017. This means the Settlor is protected from an immediate tax charge on income and gains arising in the trust when they become deemed domiciled in the UK. Under such circumstances, the Settlor (and other UK resident Beneficiaries) pay tax in respect of trust profits only to the extent they receive a benefit from the trust which is “matched” with income or gains within the trust structure (with such benefit also taxed on the remittance basis).
From 6 April 2025, protected settlement status is to be removed from all trust structures (including those already established). Under the new FIG regime, for as long as an individual qualifies, they will not pay UK tax on the income and gains of the trust as they arise or on receipt of trust distributions. Once the individual is no longer eligible, they will be obliged to pay UK tax on all profits arising within a trust structure they have established.
- Inheritance Tax (IHT)
The proposed changes go beyond the remittance rules and will affect the IHT rules too, although the new rules for IHT will be subject to consultation, with no changes before 6 April 2025.
Under current arrangements, Domicile is broadly the country or jurisdiction which is considered to be the individual’s home. Presently non-doms and trusts established by them are in certain circumstances outside the scope of IHT if those assets are situated outside the UK.
The intention is to move to a residence-based regime for IHT from 6 April 2025, although on the basis this is subject to consultation, the timing of any changes is unclear particularly with a general election expected later in the year, probably this autumn.
The existing proposals are that an individual’s worldwide assets would fall within the scope of IHT once such individual has been UK resident for ten years and once they are within the scope of IHT will remain so for ten years after the individual ceases UK residence.
As noted above, under current rules, non-UK assets held in trust structures which were established by RNDs before they became deemed domiciled in the UK are outside the scope of IHT (even after the RND becomes deemed domiciled in the UK). The Government’s intention is that the treatment of non-UK assets settled into trust by a non-dom Settlor before April 2025 will not change so there may be an opportunity for such individuals to retain existing structures to provide permanent protection from IHT or even establish a new trust before 6 April 2025.
- Next Steps
The new measures obviously represent a large change for international clients based here in the UK. Further measures are expected, hopefully well in advance of April 2025. The General Election expected in the Autumn and a likely change of Government are expected to bring further reform to these announcements (particularly in terms of the transitional arrangements). All those affected should review their situation and any relevant trust at the earliest opportunity.
Additional guidance from this firm will be available in due course once further detail and draft legislation becomes available.
If you have any concerns or queries relating to the Budget announcements or any other matter, please contact a member of our Wealth Planning team.
