Evolution of the UK’s Non-Domiciled Regime:
A Shift Towards Residence-Based Taxation
Lara Shehadeh
Family Paralegal
Introduction – What is Non-Domiciled?
For over two centuries, the UK’s non-domiciled regime has been a fundamental aspect of its tax framework, offering benefits to residents whose primary domicile is outside the country. However, recent reforms signify a significant departure from the current reality, as the nation moves towards a residence-based taxation model. In this exploration, we delve into the evolution of the non-domiciled regime and its gradual shift towards a new method of taxation based on residence.
The term “non-dom” (non-domiciled) refers to individuals residing in the UK whose permanent domicile, for taxation purposes, lies outside its borders. This status is independent of nationality, citizenship, or residency, though these factors may influence it.
Non-domiciled status is granted to individuals who live in the UK but maintain their permanent residence abroad. They must provide evidence to HMRC confirming their foreign domicile for tax purposes, typically aligning with the country they considered their primary home at birth, with intentions of eventual return, often upon retirement.
Non-domiciled individuals are UK tax residents but exempt from UK tax on foreign income and gains if kept offshore and not brought into UK accounts. However, they remain liable for UK taxation on domestically sourced income.
The reality of the “Non-dom Regime” until 2025
For generations, the non-domiciled regime has been a fundamental aspect of the UK’s tax system, providing eligible individuals with the advantageous ‘remittance basis’. This taxation system governs how foreign income and capital gains are taxed for residents not domiciled in the country. Essentially, it exempted foreign income and gains from UK tax unless remitted and protected non-UK assets from Inheritance Tax. Over time, this regime has undergone various adjustments and refinements to adapt to evolving economic landscapes and tax policies.
If you are a non-domiciled individual residing in the United Kingdom, it’s crucial to understand the taxation rules regarding foreign income and gains. In brief, currently, foreign income or gains under £2,000 are exempt from UK taxation if not remitted to the UK. However, amounts exceeding £2,000 or any funds remitted to the UK must be declared within a Self-Assessment tax return.
The Two options
Upon declaration, individuals have two options: either subject their foreign income or gains to UK taxation, with the possibility of reimbursement, or opt for the ‘remittance basis’. Moreover, individuals may face an annual charge based on their residency duration in the UK. The remittance basis taxes only UK income but sacrifices allowances and may incur annual charges based on residency length.
Alternatively, if both the UK and the country where you earned your foreign income tax you, you can usually claim tax relief. The process varies depending on whether you already paid tax on that income. If you haven’t paid tax, apply for relief in the income’s country by submitting a form or UK residence certificate. If already taxed abroad, claim Foreign Tax Credit Relief on your UK return. The amount of relief depends on the UK’s double-taxation agreement with the country of your income.
You generally pay Capital Gains Tax where you reside, with some exemptions. Long-term UK residents face annual charges: £30,000 after 7 of 9 years, £60,000 after 12 of 14 years. Foreign nationals in the UK can choose to pay UK tax on worldwide income and gains, regardless of passport.
Transition to a Residence-Based Test
The latest evolution in the non-domiciled regime heralds a shift towards a residence-based test. Beginning April 2025, individuals relocating to the UK will enjoy a tax-free status on overseas earnings for the first four years. Subsequently, if they continue residency in the UK, they will be subject to standard tax rates. This departure from the previous taxation regime in moving forward, individuals will be subject to UK income tax on worldwide income and capital gains tax on global asset disposals, irrespective of their location.
To qualify for the four-year Foreign Income and Gains (FIG) regime, individuals must
be in their initial four tax years of UK residency after a continuous absence of ten years outside the UK. Existing tax residents, who have been tax resident for fewer than 4 tax years and are eligible for the scheme, will also benefit from the relief until the end of their 4th year of tax residence. During this period, any foreign income or gains will be exempt from UK taxation if remitted to the UK. Furthermore, choosing the new four-year residency system means relinquishing personal allowances and the Capital Gains Tax (CGT) annual exempt allowance.
Taxpayers will need to submit a claim each year they wish to utilize the new Foreign Income and Gains (FIG) regime. However, unlike the current remittance basis regime, individuals likely won’t face any charge when making this claim. If a taxpayer ceases to be a UK resident within the four-year period, they can still claim any remaining qualifying years upon their return to the UK
To ease this transition, current non-domiciled individuals will receive a two-year grace period to integrate their foreign assets into the UK tax system.
The Four-Year FIG Regime
Effective from April 6, 2025, new UK residents will benefit from a four-year tax exemption on foreign income and gains (FIG) or distributions from non-resident trusts. However, they will forfeit personal allowances and annual exempt amounts for Capital Gains Tax (CGT) during this period.
Customized Transitional Arrangements
The announcement also outlines several accommodating measures tailored for current non-UK domiciled individuals who are ineligible for the new FIG regime:
- In 2025–26, non-doms losing the remittance basis and not in the FIG regime get a temporary 50% tax cut on foreign income.
- Those who have previously claimed the remittance basis will have the option, upon disposal of assets held personally on April 5, 2019, to rebase those assets to their value as of that date. Essentially, it allows taxpayers to use the value of the assets from April 5, 2019, as the new baseline for calculating any potential capital gains or losses when they sell or dispose of those assets after April 6, 2025. This option provides a potential tax benefit, as it may reduce the capital gains tax liability associated with the assets’ appreciation in value between April 5, 2019, and the date of disposal.
Temporary Repatriation Facility
A new temporary repatriation facility (TRF) will allow non-domiciled individuals to bring foreign income and gains generated before April 6, 2025, to the UK at a 12% rate during tax years 2025-26 and 2026-27.
However, it’s important to understand the implications of the transitional measures regarding non-resident trusts and the temporary repatriation facility (TRF). The TRF allows reduced-tax remittance of foreign income and gains but excludes pre-April 2025 trusts; mixed fund rules will ease.
The TRF offers benefits, but consider limits on pre-2025 trust income and use relaxed rules to handle complex tax issues effectively.
Overseas Workday Relief
Overseas Workday Relief is a current tax exemption exclusive to Non-Domiciled employed in the UK. This relief operates by treating a portion of earnings from UK employment, wholly or partly conducted abroad, as if it were foreign income. If earnings from work performed abroad are not brought into the UK, they are not subject to UK tax.
The UK Government introduced Overseas Workday Relief, providing relief to UK-employed individuals working overseas, subject to eligibility criteria. This relief will apply to income tax on earnings, regardless of whether those earnings are brought into the UK. However, no relief will be granted for National Insurance contributions.
Eligible employees can claim this relief for the first three tax years of their UK residence. Employees leaving the UK and returning after 2025-26 cannot claim relief unless they qualify for the new four-year regime.
Protected Trusts
From April 6, 2025, non-UK and deemed domiciled individuals outside the four-year regime lose tax protections on settlor-interested trust income and gains.
Settlor-interested trusts are those where the settlor—or their spouse or civil partner—controls and benefits from the trust assets.
This change requires settlors to pay tax on income and gains from these trusts, matching UK domiciled rules, unless they qualify for the four-year regime.
Non-domiciled individuals will lose the remittance basis for worldwide trust distributions, but pre-6 April 2025 trust distribution rules stay unchanged.
From April 6, 2025, four-year regime beneficiaries get tax-free benefits, excluding trust income, which faces a modified gift rule.
This significantly impacts long-term residents who benefit from Protected Trusts for tax, asset protection, and succession. Therefore, careful consideration is necessary regarding the taxation of these structures in the future.
Inheritance Tax
Inheritance tax (IHT) is a complex area of taxation, and recent and upcoming changes are set to further complicate matters for individuals, especially those with assets both in and outside the UK.
Under the current rules, IHT is primarily based on an individual’s domicile status, with assets located in the UK falling under the scope of the IHT regime, regardless of domicile or residence status. This means that even non-UK residents with assets in the UK are subject to IHT.
Assets in excluded property trusts (EPT) settled by non-UK domiciliaries remain IHT-exempt, but after April 6, 2025, IHT depends on the settlor’s residence.
Impending Changes from April 6, 2025
From April 6, 2025, significant changes are set to reshape the IHT landscape. The shift from a domicile-based system to a residence-based system will have far-reaching implications for individuals and their estates. Under the new rules, IHT will apply to worldwide assets owned outright if the individual has been a UK resident for 10 years, with liability extending for 10 years post-UK departure.
Moreover, the taxation of trust assets will also be contingent on the settlor’s residence status at the time of settlement and during subsequent charge events. However, UK assets held in trusts will continue to be taxed as currently, irrespective of residence.
Navigating the Future for Non-Domiciles
The adjustments to the tax regime for non-domiciles signify significant shifts, and while there’s a notion of simplification, the intricacies of the rules may still present multifaceted scenarios. The transitional provisions afford individuals an opportunity to reevaluate their financial strategies before the new rules come into effect.
A Final Note of Caution
The information provided in this article is derived from government press releases and technical notices released shortly after the Budget announcement. Until the government concludes its consultations on various aspects of the new regime and publishes the draft legislation, definitive commentary on the proposed changes remains pending. Therefore, it’s important to understand that our insights should not be construed as tax advice.
We are committed to closely monitoring developments and will promptly share further tax updates as the government releases additional guidance and draft legislation.
Should you have any questions or require assistance regarding this topic or any other tax-related matters, please don’t hesitate to reach out to our team.
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