As previously announced, the current rules for the taxation of non-UK domiciled individuals (“non-doms”) will end from 6 April 2025. They will be replaced by a new foreign income and gains (“FIG”) regime which will determine eligibility based on tax residence, rather than the concept of domicile.
The Autumn Budget on 30 October 2024 finally confirmed the long-awaited detail on the changes that will apply to non-doms from 6 April 2025 and the draft legislation to be approved by Parliament to bring these new tax laws into effect.
This update focuses on the key changes that will impact non-doms and new UK arrivals with their Self-Assessment (personal tax returns) reporting from the 2025/26 tax year onwards. An overview of the prior announcements and former remittance basis regime for non-doms can be found here.
The new 4-year FIG regime: Overview
From 6 April 2025, all UK residents will be taxed on the arising basis of assessment. This means they will be taxed on their worldwide income and gains, unless they are eligible to make a claim to use the new FIG regime, therefore getting 100% relief on eligible FIG arising in their first 4 years of UK tax residence.
The 4-year FIG regime will only be available for individuals who are both UK residents and within their first 4 years of UK tax residence, following a period of at least 10 consecutive years of non-UK residence. This includes UK nationals and UK domiciled individuals who may not have previously had access to the remittance basis.
Individuals who make claims to use the new 4-year FIG regime will not pay tax on FIG arising in those 4 years and will need to make these claim in their Self-Assessment tax returns. The deadline to make this claim is 1 year after the applicable tax return filing deadline, so a claim will need to be made on or before 31 January 2028 for the 2025/26 tax year.
To claim the 4-year FIG regime, individuals will need to quantify the amount of income and gains for which relief is being claimed under the regime. If amounts of FIG are not quantified and included in the Self-Assessment tax return, then individuals will remain chargeable and subject to tax at their usual rates. This is very different to the remittance basis regime, where unremitted foreign income and gains did not need to be included on the tax return.
An individual can make a claim for the new 4-year FIG regime in year 1, choose not to make a claim for year 2 and will still be able to claim for years 3 and 4.
Individuals who on 6 April 2025 have been tax residents in the UK for less than 4 years (after a period of 10 years non-UK tax residence) 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 a resident in the UK in 2023/24, after a 10-year period of non-residence, will have been resident in the UK for up to 2 tax years on 6 April 2025. The individual will be able to claim under the new 4-year FIG regime for 2025/26 and 2026/27 because that is the third and fourth year following a period of 10 years’ non-UK tax residence.
If a prior tax year within the 4-year period is a split year under the Statutory Residence Test (SRT), this will still count as a full year of UK residence for the purposes of the 4-year FIG regime. In addition, eligibility is determined with reference to the individual’s residence position under the SRT in any of the 10 years prior to arrival. Treaty residence elsewhere under a double taxation agreement tie-breaker will not be relevant for the purposes of excluding that year from the eligibility test.
A claim under the 4-year FIG regime will apply regardless of whether any of the amounts subject to the claim (i.e., arising from 6 April 2025 onwards) are remitted to the UK or not. A claimant can opt to remit any or all amounts relieved under the 4-year FIG regime, either in the year of the claim or any future year, without any additional UK tax charge, and the level of the remittance has no impact on the value that can be claimed.
Application of the new FIG regime
Generally, most common types of foreign income and gains can be relieved from tax as part of the new FIG regime, such as foreign dividends, interest, pension income, offshore income gains, partnership income, trade profits, royalties and gains accruing on the disposal of assets situated outside the UK. Not all foreign income, however, is relievable under the regime. Examples of foreign income excluded from the regime include:
- Foreign employment earnings and foreign specific employment income
- Foreign employment income paid through third parties
- Income from pensions paid under the Overseas Pension Act
- Payments from UK-tax relieved funds within relevant non-UK pension schemes
- Income paid in connection with foreign securities received in exchange for UK securities
Although foreign employment earnings and foreign specific employment income will not be relieved under the 4-year FIG regime, relief for these may be available under an Overseas Workday Relief (OWR).
Making a claim and the impacts
An individual can make a claim with respect to the 4-year FIG regime for foreign income, foreign gains or both. The claims are separate; if an individual makes a claim for one, the individual does not need to make a claim for the other. An election can also be made independently for OWR purposes. If an individual makes a claim for the 4-year FIG regime (or an OWR election) the individual will not be able to claim any foreign income losses or foreign capital losses arising in the year of the claim.
The claim for the 4-year FIG regime applies on a source-by-source basis. It is not necessary to claim relief on all sources of foreign income and foreign gains. As such, the taxpayer can choose what foreign income and which foreign gains on which to claim relief. Relief for each source must be identified and claimed on the return.
An individual will also lose entitlement to a personal allowance (PA) for Income Tax and the annual exempt amount (AEA) for Capital Gains Tax (CGT) for the tax year in which the claim or OWR election is made. The loss of entitlement to both PA and AEA will apply regardless of whether a claim is made for only income only gains or only an election for OWR is made. The PA for the 2025/25 tax year is £12,570 (for those who have not already lost entitlement due to their income exceeding £100,000) and AEA is £3,000.
Overseas Workday Relief
In its current form, Overseas Workday Relief (OWR) is an income tax relief available to UK resident, non-UK domiciled employees on earnings paid and kept offshore and related to days spent working abroad as part of their employment. Currently OWR is available for up to 3 years.
From 6 April 2025, eligibility for OWR will be based on an employee’s residence, not domicile. When an employee is eligible for the 4-year FIG regime in a tax year (“the qualifying year”), an OWR election can be made allowing the individual to make a claim for relief. From 6 April 2025, OWR will be available for up to 4 years.
From 6 April 2025, employment income can benefit from OWR relief if:
- it relates to duties performed outside the UK during a qualifying year for which an employee has made an OWR election, and
- it arises out of an employment which is wholly or partly performed outside the UK.
The extent to which income relates to duties performed outside the UK (during a qualifying year) will continue to be determined on a just and reasonable basis. In most cases, this would be a workday basis. This means that an employee’s annual earnings would be apportioned based on the number of workdays in the UK and the number of workdays overseas.
OWR will be subject to an annual financial limit for each qualifying year: the lower of 30% of the qualifying employment income or £300,000 per tax year.
Employees claiming relief under OWR will be able to benefit from it whether their income is received in UK or overseas bank accounts. Individuals will also be able to remit it into the UK if it was received offshore without a charge.
The changes to OWR will not preclude any claims to foreign tax reliefs on income which is taxed both in the UK and another jurisdiction.
OWR example and how the new restrictions apply
An employee, Fraser, becomes a UK resident in the 2025/26 tax year and is eligible to make an election for OWR in that year but chooses not to do so. In the subsequent 2026/27 tax year, Fraser remains a UK resident and makes an OWR election. He received earnings of £800,000 in 2026/27 which are for the duties he performed in that tax year. Fraser also received a bonus of £200,000 in 2026/27 which related to his duties performed in the 2025/26 tax year. His taxable earnings in 2026/27 are therefore £1M.
£350,000 of Fraser’s £800,000 earnings for 2026/27 relate to duties performed outside the UK. £50,000 of Fraser’s £200,000 bonus relates to duties performed outside the UK in 2025/26. No relief can be claimed in respect of the £200,000 earned during the 2025/26 tax year, as no OWR election was made for that tax year.
To determine how much OWR relief can be claimed by Fraser on his 2026/27 tax return, he must consider the financial limit. While Fraser has taxable earnings of £1M in 2026/27, the financial limit means his claim must be the lower of £300,000 or £240,000 (30% of 800,000). As a result, Fraser is restricted to an OWR claim of £240,000 in his 2026/27 tax return, reducing his taxable income to £760,000.
Transitional arrangements
Where employees arrived in the UK and claimed OWR in a tax year prior to 6 April 2025 and are ineligible for the new 4-year FIG regime, they will still be eligible for OWR for their first 3 years of UK tax residence.
Employees who are partway through their 3-year claim at 6 April 2025 and are eligible for the 4-year FIG regime can benefit from OWR for a total of 4 years of UK residence. These employees will have to make an election for OWR for tax years commencing on or after 6 April 2025 and will only be able to do so for tax years which are within their first 4 years of residence.
OWR for these employees for any tax years commencing on or after 6 April 2025 will be available under the new regime, rather than the remittance basis; however, employees partway through their OWR period at 6 April 2025 will not be subject to the financial limits.
Some individuals may receive “trailing income,” which is income relating to employment duties performed in a previous tax year (an example being a performance bonus). Where trailing income relates to the period before 6 April 2025 but is received afterwards, it will be treated under the pre-6 April 2025 OWR rules and, to the extent it relates to duties performed outside the UK, will continue to be taxable upon remittance. This means any income relating to pre-6 April 2025 period will still need to be paid into a qualifying overseas bank account and kept offshore to benefit from OWR.
Foreign capital gains and rebasing
UK resident individuals who do not qualify for the new 4-year FIG regime, or choose not to make a claim under it, will be subject to CGT on foreign gains in the normal way.
Current and past remittance basis users will, for disposals on or after 6 April 2025, be entitled to rebase a personally held foreign asset for CGT purposes to its market value at 5 April 2017. To qualify the main conditions are:
- Individuals must not have been UK domiciled or deemed UK domiciled at any time before tax year 2025/26.
- They must have made a remittance basis claim for any one of the tax years 2017/18 to 2024/25, which does not include years where the person has automatic use of the remittance basis without a claim being required because the amount of their unremitted FIG for the tax year is under £2,000.
- They must hold the relevant asset on 5 April 2017 and dispose of it on or after 6 April 2025.
- The asset must have been situated outside the UK from 6 March 2024 to 5 April 2025.
The Temporary Repatriation Facility
From 6 April 2025, a new Temporary Repatriation Facility (TRF) will be introduced to allow individuals previously taxed on the remittance basis an option to remit their previously untaxed FIG to the UK.
The TRF will be available for 3 tax years, from 6 April 2025. Designated amounts will be charged to tax at a rate of 12% in tax years 2025/26 and 2026/27, with the rate rising to 15% in tax year 2027/18 (the “TRF charge”). The TRF charge will be payable on the designation, but once a designation has been made, no further UK tax will be payable, regardless of the tax year of remittance. There is no requirement for amounts to be remitted during the tax year in which designated or in any later tax year.
An individual can make a designation for any amount. It will also be possible to designate amounts of an uncertain origin or where the individual no longer has records to confirm the original source of the funds. It will not be possible to set any foreign tax paid against the TRF charge because designated amounts are treated as being net of tax. Where an individual has previously paid the remittance basis charge, this also cannot be offset against the TRF charge.
To make a designation under the TRF, an election must be made in a Self-Assessment return for the relevant tax year. As the TRF will operate for 3 tax years from 2025/26, the relevant deadlines will be 31 January 2027, 2028 and 2029 respectively.
Non-liquid assets and electing not to designate
Designations will not be limited to cash held overseas. Individuals who have reinvested unremitted foreign income and gains received whilst they claimed the remittance basis in previous years could be in a position where their funds are not readily available. It is possible to make designations on the amounts used to purchase non-liquid assets. Designations will not be impacted by a fall in this asset’s value below the original amount of any income or gain invested. A claim to rebase an asset to its April 2017 value for CGT will also not impact the amount of the original investment that can be designated.
If an individual does not make an election to designate an amount under the TRF, the individual will still be able to claim a credit for any foreign tax paid against the tax due on remittance of that amount.
Important planning between now and 6 April 2025
Planning that non-doms and their advisers may want to be thinking about between now and 6 April 2025 includes:
- Would ring-fencing some pre-6 April 2025 unremitted FIG and bringing that into the UK after 6 April 2025 to make use of the TRF and the favourable 12% rate be advantageous? The 12% TRF charge represents a significant discount against the maximum income tax rate of 45%, which could apply to non-doms who remit previously unremitted foreign income to the UK.
- Should non-UK assets be sold prior to the new regime? Would the sale of that non-UK asset be most advantageous before or after 6 April 2025, either to make use of the TRF or be able to rebase cost of the asset to its 5 April 2017 value?
- Should an employee’s employment income continue to be paid into an offshore account to ensure that any trailing income, relating to pre-6 April 2025, continues to be eligible for OWR under the transitional arrangements?
- Do current offshore investments need changing or recalibrating to reflect that worldwide reporting of FIG will be required from 6 April 2025 under Self-Assessment? Now may be the best time to make sure that offshore investments and assets are structured as efficiently as possible and consider the impact of the UK’s reporting and non-reporting offshore funds rules.
Summary
The above is only a snapshot of the new legislation released with the Budget and focuses solely on the main areas of the new FIG regime which impact Self-Assessment, OWR claims, CGT rebasing and the TRF. The draft legislation also includes many awaited details of how the abolishment of the non-dom regime would impact Inheritance Tax and Offshore Trusts, topics which are not covered in this article.
Consulting with Frazier & Deeter’s experts in the non-dom and personal tax field should provide valuable guidance to individuals impacted by these new rules.
For more information, please contact:
Jonathan Clark, Tax Partner | jonathan.clark@frazierdeeter.com