The UK government is gearing up for significant changes to the tax system. These changes primarily target non-domiciled individuals (non-doms) and their tax liabilities.
The proposed changes, slated to take effect in April 2025, mark a significant departure from the existing regime, aiming to create a level playing field for all taxpayers while still attracting global talent and investment.
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Who are non-domiciled residents?
Non-domiciled residents are people living in the UK who consider their permanent home outside of it.
To qualify as a non-dom resident, individuals must meet specific criteria:
They or their father must have been born in another country
They must have a plan to return to that country.
Some individuals may qualify if they don’t meet these criteria, for example, if they have a significant personal connection to a country.
What is the current tax law for non-doms?
Under the current set-up, non-doms enjoy preferential treatment, allowing them to defer tax on foreign income and gains until remitted to the UK. This can result in substantial tax savings; some non-doms are completely exempt from tax on money earned abroad.
Here’s the breakdown:
Non-doms earning less than £2,000 per tax year and not bringing that money into the UK do not have to pay UK tax on their foreign income or gains.
Non-doms who earn over £2,000 must report their foreign income through Self-assessment. Then, they either:
Pay tax on all foreign income brought into the UK
Only pay tax on the income brought into the UK.
The second option is more complex and comes with trade-offs as non-doms lose their tax-free allowance for Income and Captial Gains Tax. Additionally, they have to pay an annual charge based on their time as a UK resident of:
£30,000 if they’ve been here for more than 7 of the last 9 tax years; or
£60,000 if they’ve been here for more than 12 of the last 14 tax years.
How will reforms change the way non-UK domiciled individuals are taxed?
Under the proposed framework, individuals residing in the UK for more than four years will be subject to UK tax on all foreign income and gains, aligning their tax obligations with those of other UK residents.
Central to the reform is a four-year tax relief window for new arrivals, giving them a reprieve from paying tax on foreign income and gains during the initial phase of their residency. This incentive aims to attract international talent, positioning the UK as an attractive destination for skilled professionals and investors.
Further, the reform package includes provisions for existing non-doms. Transitional arrangements, such as a temporary reduction in tax liability and the establishment of a Temporary Repatriation Facility, seek to mitigate the impact of the changes on current non-doms while facilitating their adherence to the new tax norms.
New Foreign Income and Gains (FIG) Regime
Individuals who become tax residents after 10 years of non-UK residence will enter a new 4-year FIG regime.
During this period, they won’t pay tax on foreign income and gains for the first 4 tax years after becoming a UK tax resident. They can bring these funds into the UK without extra charges. Additionally, they won’t pay tax on non-resident trust distributions.
However, they’ll still pay tax on UK income and gains, similar to non-dom individuals.
Transitional Arrangements
Individuals who have been tax residents in the UK for less than 4 years on 6th April 2025 can use the new regime for the remainder of those 4 years.
Changes to Taxation on Trusts
From 6th April 2025, the protection from taxation on future income and gains within trust structures will be removed for certain individuals.
This means foreign income and gains arising in non-resident trust structures will be taxed on the settlor or transferor.
Transition to Arising Basis
Individuals moving from the remittance basis to the arising basis on 6th April 2025 will, for the tax year 2025-26 only, pay tax on 50% of their foreign income.
Temporary Repatriation Facility
Individuals who have been taxed on the remittance basis can opt for a reduced tax rate of 12% on pre-6th April 2025 foreign income and gains under the Temporary Repatriation Facility, which will be available for 2025-26 and 2026-27 tax years.
Inheritance Tax Changes
The government also intends to shift inheritance tax from a domicile-based regime to a residence-based one, pending consultation.
Who will be affected by the reforms?
The proposed reforms are projected to generate substantial revenue, with estimates suggesting an additional £2.7 billion annually by 2028-29, supplementing the existing tax contributions from non-doms.
Individuals
Following reforms, new UK residents or those returning after at least 10 years overseas can choose not to be taxed on their foreign income or gains for their first four years in the UK.
However, opting into the FIG regime means losing personal allowances and the capital gains tax-exempt amount, just like under the remittance basis.
Further, qualifying individuals won’t be taxed on their foreign income or gains, even if brought into the UK. They can also receive offshore trust distributions without paying UK tax on them.
Current remittance basis users in the UK for fewer than four tax years can use the FIG regime for the remainder of their first four years of UK tax residence.
Those who have been UK residents for four tax years by April 6th 2025 won’t be eligible for the FIG regime. However, there are concessions to ease the transition:
In the tax year 2-25/26, individuals moving from the remittance basis to the arising basis will only be taxed on 50% of their non-UK source income.
Individuals who claimed the remittance basis and aren’t domiciled or deemed domiciled in the UK on April 5th 2025 can adjust the value of their foreign assets to what they were worth on April 5th 2019 when they sell them.
A Temporary Repatriation Facility will be available for 2025/26 and 2026/27, allowing individuals to bring pre-April 6th 2025 income and gains to the UK at a reduced tax rate of 12%.
Settlors and beneficiaries of offshore trusts
The reforms will also abolish the Finance (No.2) Act 2017.
This means that if you're the person who set up a trust (the settlor) and you live in the UK, any income or gains from that trust will be considered yours for tax purposes. If you're not eligible for certain tax benefits related to foreign income and gains, you'll be taxed on the income and gains from the trust as they occur.
For people in the UK who receive benefits from trusts set up abroad and qualify for certain tax benefits, the distributions they receive won't be matched with the income and gains of this trust. This stops a trust's income or gains from being offset by distributions to UK residents during their first four years of living in the UK for tax purposes.
Additionally, there are plans to change how gifts given onward from trusts are taxed, but details of these changes haven't been published yet.
Inheritance tax changes
Currently, if you're domiciled or deemed domiciled in the UK, you have to pay inheritance tax (IHT) on your worldwide assets. Non-doms, however, only pay IHT on assets in the UK and certain non-UK assets linked to UK residential property.
Under the new rules, after living in the UK for 10 years, individuals will have to pay IHT on all their worldwide assets. Even after leaving the UK, they'll still be subject to IHT on worldwide assets for another 10 years (called the 'tail provision').
Additionally, any trust property settled before April 6th 2025 that currently qualifies as excluded property will continue to be exempt from IHT on anniversaries or when it's taken out of the trust. The rules about gifts with reservation of benefit won't change either.
Whether the trust property is subject to IHT will depend on whether the settlor meets the residency criteria at the time of settlement or anniversaries or exists from the trust.
How can Lawhive help?
It’s essential for individuals affected by these changes to understand their implications fully.
A money, tax, and debt lawyer can provide personalised advice and guidance, helping you make informed decisions about financial matters if you currently have non-dom status in the UK.
For more information and a free, no-obligation case evaluation, contact our legal assessment specialists today.