The Chancellor of the Exchequer delivered his Spring Budget to the House of Commons on 6 March 2024. This update focuses on the key announcements outlined by the government in that Budget that will impact the current tax treatment of non-UK domiciled individuals (“non-doms”) from 6 April 2025, i.e. the 2025-2026 UK tax year onwards.
The Current Non-dom Regime
Non-doms are individuals whose permanent home, or domicile, is considered to be outside the UK. The current non-dom regime is a favourable tax regime which allows non-doms who are UK residents to opt to file their taxes under either the ‘arising’ or ‘remittance’ basis of taxation.
Under the arising basis, the non-dom pays tax on their worldwide income and gains, just like a UK resident or UK domiciled individual. Under the remittance basis, the non-dom pays tax on their UK source income and gains and only on their foreign income or gains (“FIG”) to the extent that they are remitted, or brought to, the UK.
The potential downsides of a non-dom electing to file under the remittance basis is that they can lose their entitlement to the UK tax free personal allowance and capital gains annual exemption. Additionally, they can be subject to a remittance basis tax charge, where a £30,000 or £60,000 charge is payable by the non-dom for continuing to elect to file their taxes under the remittance basis regime once they have been tax resident in the UK for more than 7 out of 9, and then 12 out of 14, tax years in the UK.
The UK introduced a deemed-domiciled concept a few years ago, which meant that any non-dom who had been resident in the UK for at least 15 of the preceding 20 UK tax years would then be considered deemed-domiciled, i.e. no longer eligible for the remittance basis of taxation and instead required to pay their taxes under the arising basis of taxation.
The current non-dom regime does not allow the remittance of FIG to the UK. Any remittance of FIG that had previously been exempted from UK tax under the remittance basis would be taxable in the UK in the tax year of remittance. There are complex rules to determine whether FIG has been remitted to the UK from overseas sources which contain a mix of FIG and other sources of income, known as a ‘mixed fund.’
April 2025 Changes to the Non-dom Regime
From 6 April 2025, the current remittance basis of taxation will be abolished for UK resident non-doms. This will be replaced with a new 4-year foreign income and gains regime (“4-year FIG regime”) for individuals who become UK tax resident after a period of 10 tax years of non-UK residence.
Under the new regime, regardless of where the individual is domiciled, new arrivals to the UK will be able to benefit from 100% UK tax relief on FIG for the first 4 tax years that they are tax resident. Anyone who has been tax resident in the UK for more than 4 tax years will pay UK tax on any newly arising FIG, as is the case for all other UK residents who currently pay tax under the arising basis of taxation.
To qualify as a new arrival and be eligible for the 4-year FIG regime, an individual must have a period of 10 tax years of non-residence status before they arrive and become UK tax resident. Under the new regime, individuals will be able to bring FIG into the UK without attracting any tax charge, something they would not have been able to do under the existing non-dom and remittance basis regime.
As with the existing non-dom regime, if an eligible individual chooses to be taxed under the new 4-year FIG regime, they will lose entitlement to personal allowances and the capital gains tax annual exempt amount.
Specifics to the New 4-year FIG Regime
Claims to use the new 4-year FIG regime are to be made for each year to which it is to apply. Individuals do not need to make a claim for every year of the 4-year period. For example, an individual who makes a claim for the new 4-year FIG regime in year 1, but chooses not to make a claim for year 2, will still be able to claim for years 3 and 4.
If an individual leaves the UK temporarily during the 4-year period they will be able to make a claim under the 4-year FIG regime for any of the qualifying tax years remaining on their return to the UK. For example, if someone becomes a non-UK resident in year 2 and 3 but is UK resident again for year 4, they will be able to use the new 4-year FIG regime for year 4.
Individuals who have been tax resident in the UK for less than 4 years (after a period of 10 years non-UK tax residence) on 6 April 2025 will be able to use this new regime for any tax year of UK residence in the remainder of those 4 years. For example, an individual who became resident in the UK in 2022-2023, after a 10-year period of non-residence, will have been resident in the UK for up to three tax years on 6 April 2025. They will be able to claim under the new 4-year FIG regime for 2025-2026 because this is their fourth year following a period of 10 years non-UK tax residence.
The tax benefits of Overseas Workday Relief (“OWR”), which can currently be enjoyed by non-doms taxed on the remittance basis during their first 3 tax years of UK tax residence, will also be retained and simplified under the new regime. Details are to be confirmed, but the requirement to maintain an offshore special mixed fund account are likely to be removed, which should make claiming this relief much simpler for eligible individuals.
Transitional Arrangements that Will Impact Non-doms
These reforms represent a significant change for non-doms affected by the replacement of the remittance basis of taxation regime with this new 4-year FIG regime.
The government has announced the following transitional arrangements for non-dom individuals:
- Individuals who move from the remittance basis to the arising basis of taxation on 6 April 2025 and are not eligible for the new 4-year FIG regime will, for 2025-2026 tax year only, pay tax on 50% of their foreign income. This reduction applies to foreign income only; it does not apply to foreign chargeable gains. For 2026-2027 onwards, tax will be due on all worldwide income under the arising basis in the normal way.
- From 6 April 2025, individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittances of pre-6 April 2025 FIG under a new Temporary Repatriation Facility (TRF) that will be available for tax years 2025-2026 and 2026-2027 only.
- From 6 April 2025, an individual who is not, or who later ceases to be, eligible for the new 4-year FIG regime will be taxed on foreign gains in the normal way. Transitional rules will apply for individuals who have claimed the remittance basis and are neither UK domiciled nor UK deemed domiciled by 5 April 2025. If, on or after 6 April 2025, an individual disposes of a personally held foreign asset that they held at 5 April 2019, they will be able to elect to rebase that asset to its value as at 5 April 2019.
Important Considerations for Non-doms
The technical detail of the new 4-year FIG regime and transitional rules will be outlined in draft legislation which will be published later in the year by the government. Impacted non-doms should be aware of how the new regime could impact their UK tax filings, and where appropriate, consult with an advisor on the appropriate detail when the draft legislation is published.
The new TRF facility might provide a potential window for an individual to remit pre–April 2025 FIG to the UK at a reduced rate of 12% tax, which would otherwise have been taxed at regular income or capital gains tax rates.
If non-doms want to maintain their overseas assets and funds which generate FIG post-April 2025, advance consideration should be had as to how that future FIG will need to be reported and taxed in the UK.
Conclusion
The remittance basis regime was an attractive tax filing method for non-doms, and although the new 4-year FIG regime provides a much shorter window for non-doms to avoid paying UK tax on FIG, the new regime will significantly simplify matters with the removal of the complex rules around offshore mixed funds and remittances of post-April 2025 FIG to the UK.
Consulting with experts in the non-dom and personal tax field should provide valuable guidance to impacted individuals as they navigate these forthcoming regime changes and prepare for how their future returns will need to be filed in the UK, as well as potentially leverage any benefits available to them under the transitional rules.