On 6 March 2024, chancellor Jeremy Hunt delivered his Spring Budget. One of the changes he announced was a significant overhaul of the non-domicile tax regime.
The government have been consistent in their belief that “those with the broadest shoulders should contribute a bit more”, and there’s been increasing political pressure to address non-dom tax.
According to the chancellor, abolishing the non-dom status will raise £2.7 billion a year. Meanwhile, a study from the University of Warwick and the London School of Economics revealed that abolishing the regime would raise approximately £3.6 billion a year.
Whatever the actual figure turns out to be, the government believes that “the concept of domicile is outdated and incentivises individuals to keep income and gains offshore”.
To this end, they have introduced plans to modernise the tax system with a new residence-based regime, which will come into effect in April 2025.
The current non-dom rules
For the time being, if you're a non-dom residing in the UK you can use the current “remittance basis” for taxation of income and gains you remit to the UK from overseas.
This means that you'll only face UK taxes on money you bring into the country. Any non-UK income and gains you make will remain exempt from UK taxes, as long as they remain outside the UK.
Under current rules, after seven years, non-doms have to pay an annual charge to continue benefiting from this remittance basis of taxation. Should you have been UK resident for 15 years out of the past 20 years, you'll be “deemed domiciled”, and subject to tax on your global income and gains.
Inheritance Tax (IHT) is also dependent on your domicile status and location of assets. As such, if you're a non-dom, your estate wouldn't be liable to pay IHT on non-UK assets unless you've been a UK resident for 15 out of the past 20 tax years and are deemed domiciled.
Expected changes planned for April 2025
The changes announced in the 2024 Spring Budget represent a radical revision to the remittance regime.
The current non-dom “remittance basis” regime will be replaced with a new residency-based regime to include Foreign Income and Gains (FIG).
From April 2025, people moving to the UK won’t have to pay UK tax on money they earn overseas for the first four years of living in the UK – essentially scrapping the “remittance basis” rule.
Under the new regime, if you’ve not been UK resident for the previous 10 years, while you can elect to not pay UK tax on non-UK income and gains for the first four years of your residency, you won’t be entitled to a Personal Allowance or the Capital Gains Tax Exempt Amount for this period.
If you move to the UK and continue living in the country beyond four years, you’ll then be expected to pay the same tax as everyone else.
In short, the new regime will depend on residence rather than domicile.
Potential changes to Inheritance Tax rules
Currently, your estate’s liability to IHT depends on your domicile status and the location of the relevant asset.
However, another proposal under consultation is that individuals will only be subject to UK IHT on their non-UK assets after 10 years of UK residency (if they have been non-UK resident for at least 10 years previously).
Under the new residence-based regime, UK IHT could be applied to worldwide assets that are owned outright if you have been tax resident in the UK for 10 years. If you’re a UK taxpayer and you leave the UK, you may remain liable to an IHT charge for another 10 years following your departure.
The government are consulting on this proposed IHT change and nothing is yet set in stone.
The UK general election could bring further change
While rumours rumble that a general election could be called in October 2024, we can be certain that there will be a general election before these changes are expected to come into effect.
With the Labour Party already stating that it will abolish the non-dom regime, there’s no guarantee that the changes that the chancellor has proposed will be implemented.
Transitional provisions that may matter if you’ve recently moved to the UK but are not yet domiciled
If you’ve been in the UK for less than four years, you can elect to use the FIG for the remainder of the four years. Beyond year four, you will be liable for worldwide income and gains tax.
However, if you’ve already been a UK resident for more than four years you will move immediately to the “arising basis” of taxation. This means that you’ll pay UK tax on your worldwide income and gains, regardless of whether they are remitted into the country.
Fortunately, there are planned transitional provisions for non-domiciled individuals who are currently using the remittance-based regime:
- Individuals will be subject to UK tax on only 50% of their non-UK source income in the 2025/26 tax year.
- Individuals will have the option to rebase foreign assets to their value on 5 April 2019. So, if you dispose of foreign assets, you can elect to be taxed only on capital gains earned after that date.
- A new “temporary repatriation facility” will allow non-doms the opportunity to remit foreign income and gains that arose before 6 April 2025 to the UK at a rate of 12% in the tax years 2025/26 and 2026/27. Any income or gains remitted after this will be taxed at the normal prevailing rate.
If you’re considering returning to the UK, you could benefit from 4 years of tax relief
Under the new FIG regime, if you move to the UK after at least 10 years of not being a UK tax resident, you can claim exemption from tax on any non-UK sourced income or gains for up to four tax years.
It’s important to note that claims need to be made annually; you can’t claim all four years at once.
And remember, if you make a claim under the FIG regime, you’ll lose your entitlement to a Personal Allowance and Capital Gains Tax Annual Exempt Amount for that tax year.
After four years of UK tax residency, you will become liable to pay tax on your worldwide income and gains at the prevailing tax rates.
We can help you prepare for the changes
If you would like to understand how these incoming changes could affect you and your financial plan, we can help.
We’ll look at your unique circumstances and explain how the new rules might apply to you. We can also advise you on appropriate strategies for tax-efficient saving and investing, according to where you live now, or expect to move to in the future.
Get in touch
Whether you have already returned to the UK, or are thinking about doing so, get in touch today. Email enquiries@alexanderpeter.com or give us a call on +44 1689 493455.
