Are you a UK tax resident who has been claiming a non-domicile (non-dom) tax status?
Have you commenced planing for the upcoming changes that will be applied to non-domiciled residents?
Substantial changes were announced in the Spring Budget 2024 that will impact the tax treatment of individuals that make use of the non-dom status. The preferential tax regime that has been based on an individual’s domicile is set to be abolished from 6 April 2025.
It will be replaced by a less tax advantageous system, based on an individual’s years spent as a UK tax resident. This will involve a reduced exemption period from UK tax, related to foreign income and capital gains which includes if the money in question is brought into the UK, or not.
In this post we cover the intricacies of the changes to the non-dom regime, how this impacts non-domiciles and even some UK domiciled individuals, and how to go about planning your tax affairs prior to the new regime coming into effect.
Read on to find out more about (click the links to access the relevant sections):
A non-dom is short for a non-domiciled individual, and refers to their tax status, being a UK resident but where the country they consider home is based outside of the UK for the potential purpose of optimising their tax profile.
Every individual has a domicile, namely the country that is their permanent home, or that they have a substantial connection with. You can't be domicile in more than 1 country, or not have a domicile at all. Residence on the other hand, in simple terms, refers to where you live. You can be resident in more than 1 country at the same time depending on the rules and laws of the countries in question.
Non-doms may be resident in the UK but their domicile is based outside this country in relation to their personal and financial interests. This can then impact on their exposure to UK:
The tax status dates back over 200 years to colonial times and is a concept of common law. Domicile is determined by:
If an individual was born abroad, had parents that lived abroad, or they themselves lived abroad for a period of time, then historically they've been able to potentially use this to select their domicile status. Doing so provides them with an avenue to potentially reduce their tax liability if they select a low tax jurisdiction as their place of domicile.
Under the current regime you are deemed domiciled, and therefore subject to UK taxes on your income, gains, and wealth, if you have been a UK resident for 15 out of the last 20 tax years.
If you become a non-UK resident for a minimum of 6 tax years then for income tax and CGT purposes you could be classified as a non-dom. Under IHT legislation your deemed domicile status can cease once you've been a non-UK resident for a minimum of 4 tax years.
Domiciled individuals are taxed in the UK on their worldwide income and gains. Non-doms on the other hand can choose to be taxed in 1 of 2 ways:
Arising basis, this works whereby your income is taxed in the year it is earned or received. Whether you bring your money back into the UK or keep it overseas, it remains subject to taxation on worldwide income and gains.
Remittance basis dictates that your foreign income is only subject to UK taxation when it is brought into the UK, or utilised within the UK.
The default position for UK resident non-doms is that UK-based income and capital gains are taxed on an arising basis. The remittance basis has to be claimed annually on your tax return and if you don't make a claim then the arising basis is applied automatically. You can opt into, and out of, the remittance basis on a yearly basis.
When you claim through the remittance basis, you lose all personal allowances and breaks that can usually be applied to UK sourced income for that tax year. This also means you don't benefit from the CGT annual allowance. The exception to this is if your non-UK income is less than £2,000 in any given tax year, in such instances you can then keep the allowances.
There will be a new residence-based ‘Foreign Income and Gains’ (FIG) tax regime for the 2025/26 tax year onwards. You can potentially avoid UK tax on your foreign income and gains generated within an initial 4 years of your tax residence commencing. To qualify for this treatment, you have to have maintained non-tax residency in the UK for the previous 10 years.
Similar to the current remittance basis, opting for the new FIG regime may result in the loss of your entitlement to the Income Tax personal allowance and the CGT annual exemption. However, these changes could potentially eliminate any tax charges when bringing "Foreign Income and Gains" into the UK during this specified period.
If you're an existing tax resident, and you've been tax resident for less than 4 tax years, then you may be eligible for the scheme while also benefiting from the relief until the end of your 4th year of tax residence.
If, as a non-dom, you're set to lose access to the remittance basis from 6 April 2025 and you're not eligible for the 4-year exemption, you'll instead have access to a temporary relief regarding your personally owned assets. As part of this, there will be a ‘re-basing’ of your assets to what they were valued at on 5 April 2019.
This means that if you make a disposal after 6 April 2025 then your gains will be taxed based on the difference in value between the sale price and value as at the end of the tax year in 2019. You will also benefit from a temporary reduction in tax, by 50%, on foreign income in the 2025/26 tax year.
For the 2025/26 and 2026/27 tax years, if you have claimed the remittance basis of taxation previously, then you'll be able to bring FIG that arose before 6 April 2025 to the UK and pay tax at a rate of 12%.
If you have trusts located outside of the UK, you may currently benefit from a deferral on FIGs generated within those trusts. However, as of 6 April 2025, this tax relief will no longer be available for non-dom settlors who do not fall within the 4-year exemption period, including any FIGs generated in existing trusts.
Trusts established by non-dom individuals before April 2025 will still provide mitigation from UK Inheritance Tax on non-UK assets. The regulations for trusts created after April 2025 are currently under review and subject to consultation.
The continuation of matching pre-6 April 2025 FIG to trust distributions and other benefits for UK residents will remain in place. Beneficiaries within the 4-year exemption period can now receive benefits from a non-UK trust from 6 April 2025 without incurring any UK tax charges.
Non-doms taxed on the remittance basis are currently eligible for Overseas Workday Relief (OWR) during their first 3 years of UK tax residence. This works whereby earnings attributable to overseas work can be taxed on the remittance basis. OWR will continue and will be tested based on residence, not domicile.
At present, your liability to IHT depends on your domicile status, as well as the location of your assets and whether they're held in trust. As of 6 April 2025, IHT will be tested by reference to residence and not domicile. Changes are still subject to consultation, but it appears that you'll be subject to IHT on your worldwide assets if resident in the UK for 10 years, or more.
IHT will continue to apply for a further 10 tax years if you have left the UK. If you have assets that are owned by a trust, these will also be subject to a new resident based system. Non-UK assets settled by a non-dom into trust before 6 April 2025 will not change and will not be subject to UK IHT.
The updates to non-dom tax legislation, and new rules, mean you'd be well advised to obtain a review of your financial affairs with a view to planning. Doing so is likely to ensure you're as tax efficient as possible, and not paying any more than you're legally required to.
The content of this post was created on 25/03/2024 and updated on 23/04/2024.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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