The tax regime for UK resident but non-UK domiciled individuals (‘non-doms’) is set to undergo sizeable changes from 6 April 2025. We’ll have a clearer picture of what those look like after the Budget on 30 October, but for now, we’ve summarised the key proposed points and included our advice on them below.
WHAT ARE THE CURRENT RULES?
Income Tax & Capital Gains Tax
There are currently two different basis of taxation for UK tax residents in the UK: the arising basis, and the remittance basis.
The arising basis means that UK tax resident individuals are liable to UK tax on their worldwide income and gains.
Under the current rules, those who are UK tax resident but non-domiciled have the option to claim the remittance basis of taxation. The remittance basis will subject UK tax resident individuals to tax on their UK source income and gains, and any foreign income or gains that are remitted (brought into or enjoyed) into the UK. Foreign income and gains that are not remitted and retained offshore are excluded from UK taxation.
Remittance basis users must make an election on their tax return to claim this basis of taxation and will lose the annual entitlement to the income tax personal allowance and capital gains tax annual exempt amount. When the individual has been UK tax resident for more than seven out of the previous nine years, an annual charge will apply for making the election (£30,000 a year which increases to £60,000 once an individual has been resident for more than 12 years).
Once the individual has been resident for 15 out of the previous 20 years, they will be deemed domiciled in the UK for tax purposes and will be subject to the arising basis of taxation.
Inheritance Tax
The current rules subject non-UK domiciled individuals to Inheritance Tax (IHT) on their UK situs assets. Individuals who are domiciled in the UK are subject to IHT on their worldwide assets.
THE NEW RULES: WHAT’S CHANGING?
Income Tax
From 6th April 2025, a new regime will apply for individuals who become UK tax resident.
If an individual has been resident for a period of at least 10 consecutive tax years of non-residence, for a period of four tax years from the point the individual first becomes UK tax resident, the individual will not pay tax on their foreign income and gains arising in a tax year regardless of whether or not these funds are brought into the UK.
These are known as the FIG regime rules. This won’t require individuals to track their foreign income and gains or keep the funds offshore.
After the four-year period has elapsed, and for individuals who have been resident in the last ten years but subject to the non-domicile regime, the FIG regime rules won’t apply and the individual will be subject to the arising basis of taxation.
So, if you have previously been UK tax resident but non-domiciled, you will need to carefully consider unremitted funds and avoid remitting these, even after the rules have changed, as a tax charge may crystalise if income and gains are brought into the UK after 6th April 2025, despite the non-dom rules changing entirely.
For that reason, record keeping and segregation of accounts are crucial if you’re considering this change. And we’re working closely with advisers and our clients to take action ahead of these changes.
The government have also announced the introduction of a ‘temporary repatriation facility’.
Individuals who have previously claimed the remittance basis and hold foreign income and gains which arose before 5th April 2025 will continue to be taxed on these funds if they remit them to the UK. Here, it’s necessary to identify the source of funds to establish the tax treatment (income, gains or clean capital).
The temporary repatriation facility will allow individuals who have previously claimed the remittance basis to remit previously accrued foreign income and gains into the UK after 6th April 2025 at a reduced rate for a limited period of time. The reduced rate and duration of this facility are currently under review, and we’ll be keeping you up to date as things progress.
Capital Gains Tax
From 5th April 2025, individuals who have previously claimed the remittance basis will be able to rebase foreign assets that are held personally. By rebasing the cost, the original cost, which is a deduction against the capital gain, will be replaced by the market value of the asset as of 5th April 2019. This is a great opportunity to consider maximising relief, particularly if the capital gains tax rate changes in the upcoming Budget.
An individual who is eligible to claim relief under the new FIG regime who disposes of a foreign asset within the qualifying four-year period will not be liable to pay UK tax on the gain arising on sale. This will be the case regardless, even if the proceeds are remitted to the UK. In this case, a rebasing election should not be required.
Inheritance Tax
From 6th April 2025, a residence based scheme will apply to IHT.
This change will mean that individuals who are resident will be subject to UK IHT on their worldwide assets once they have been UK tax resident for a period of 10 years.
In addition, the current proposals suggest that once an individual meets the residence condition, they will remain within the scope of UK IHT unless they become and remain non-UK tax resident for a period of 10 years.
It’s therefore crucial to consider your exposure to IHT, by considering the value of your worldwide estate together with your will, whether this will has been prepared in the UK or in another jurisdiction. Estate administration will also potentially be a complex issue going forward.
KEEPING PACE WITH A FAST-MOVING LANDSCAPE
We’ll be sharing our insights on all the most important changes in the lead-up to the Budget and beyond.
