Domicile

New Rules From 6th April 2025 Following Budget Announcement

The changes will come into effect on 6 April 2025, as outlined in the budget announcement made on 30 October 2024. Please be aware that, while these rules are anticipated based on this announcement, they may still be subject to further clarifications and possible amendments.

Non-Domiciled Individuals in the UK: Key Changes and Implications

As the UK government moves toward abolishing the concept of domicile, significant changes are being introduced that impact non-domiciled individuals (non-doms) residing in the UK. The recent budget announcement has confirmed new measures that reshape how foreign income and gains (FIGs) are taxed, along with implications for inheritance tax (IHT) and other areas of tax compliance. This article explores the key changes, the new regime for non-doms, and what it means for individuals considering or living in the UK temporarily.

The Transition Away from Domicile

The shift from domicile to a residence-based tax system signifies a major change in how the UK will assess an individual's tax obligations. Previously, an individual’s domicile status influenced their liability to UK taxes on income and capital gains. The government is now transitioning to a regime that emphasises residency, which introduces both opportunities and challenges for non-doms.

New Regime for Foreign Income and Gains (FIGs)

Overview of the FIG Regime

Starting from 6 April 2025, the existing remittance basis regime will be replaced by a new FIG regime specifically designed for non-doms. Under this regime:

1. Four-Year Exemption: New arrivals to the UK and individuals who become UK tax residents after being outside the UK for ten consecutive years will not pay tax on their foreign income and gains for the first four years of their UK residency. This is beneficial for individuals planning short-term stays in the UK.
2. Tax-Free Remittance: During these initial four years, individuals can bring FIGs into the UK without incurring additional tax charges, offering greater flexibility compared to the previous structure.

Reporting Requirements and Administrative Burden

While the four-year exemption seems advantageous, the method of claiming it involves substantial administrative requirements. Taxpayers will need to report their worldwide income and make claims to reduce their net income by qualifying FIGs. This means increased reporting obligations and costs associated with completing tax returns. Moreover, claiming FIGs will negate the use of the income tax personal allowance and capital gains tax annual exemption for that year.

Transitional Rules

It's important to note that individuals already UK tax residents for four years or more prior to 6 April 2025, will not benefit from this transitional FIG regime. Their existing income and gains will still be subject to the original remittance rules until the FIG regime takes effect at the specified date.

Other Key Considerations

Several additional stipulations complicate the new FIG regime:

• Business losses incurred entirely outside of the UK during a year in which a FIG claim is submitted cannot be offset against UK tax liabilities in that year or any future tax year.
• Submitting a FIG claim results in the removal of the personal allowance for income tax and/or the annual exempt amount for capital gains.
• FIG claims are disregarded when calculating adjusted net income, which affects allowable pension contributions. Therefore, non-qualifying FIG amounts will still be included in this assessment.
• Certain types of foreign income are excluded from qualifying for FIG claims. This includes income generated directly or indirectly from entertainment or sports activities, regardless of whether they take place in the UK or elsewhere.
• Disposals of “property rich companies” do not qualify as gains under FIG claims, meaning they remain subject to taxation.
• Taxpayers lose the ability to use foreign capital losses incurred in tax years during which they make a FIG claim.

Changes to Overseas Workday Relief (OWR)

Overseas Workday Relief, now referred to in the draft legislation as the “foreign employment election,” will be extended for a period of four years. However, it will be limited to the lesser of 30% of the employee's total employment income or £300,000 annually. With removal of the remittance basis, it will no longer be necessary for employees to keep the foreign portion of their employment income offshore to qualify for relief.

Transitional rules specific to OWR will address situations where individuals who have relocated to the UK anticipated utilising this relief for the first three years, even if they were not previously resident outside the UK for the required 10-year period. These individuals will still be able to take advantage of OWR.

Introduction of the Temporary Repatriation Facility (TRF)

The draft legislation provides additional details on the Temporary Repatriation Facility (TRF), which enables taxpayers who have utilised the remittance basis for at least one year to bring previously untaxed income and gains into the UK at a reduced tax rate.

Taxpayers can "designate" funds held in an account and pay tax on these funds at a rate of 12% for the tax years 2025/26 and 2026/27, and 15% for the tax year 2027/28. This allows taxpayers and their advisors until 31 January 2028, to identify the funds eligible for designation and the lower 12% tax rate.

When remitting funds, only those designated for the current tax year can be included. However, designated funds that remain offshore can be remitted in the future without incurring an additional charge, with the TRF tax applied for the year in which the funds were designated.

The draft legislation also introduces flexibility in how designated funds are identified, allowing these funds to be prioritised over other income and gains when remitting. Designation is permissible even when the complete breakdown of the funds in an account has not been established, potentially leading to significant tax savings. It's important to note that the presence of foreign tax credits might result in smaller tax savings. Overall, the primary benefits include certainty in filing and reduced time spent identifying eligible funds.

Capital Gains Tax Rebasing

Under the new regime, individuals who previously used the remittance basis will have the opportunity to rebase foreign assets to their market value as of April 5, 2017, provided they are not considered UK domiciled by April 5, 2025. The rationale for selecting 2017 as the rebasing date is unclear, but it may offer some relief to those transitioning to the new regime.

The rebasing option introduced in 2017 will continue to apply for individuals who qualified for it, and the rebasing provisions established for trusts in 2008 will also remain in effect.

Implications for Inheritance Tax (IHT)

As previously anticipated, we are entering a new era for Inheritance Tax (IHT) where domicile will no longer play a pivotal role in determining tax liabilities.

Under the new regulations, the assessment for whether non-UK assets fall within the scope of IHT will hinge on whether an individual has been a UK resident for at least 10 out of the 20 tax years immediately preceding the chargeable event (such as death).

Initially, there were concerns that this could create an abrupt cutoff—if an individual stays in the UK for 11 years, they could be subject to UK IHT for the subsequent decade. However, the rules will incorporate a tapering approach for those who have been UK residents for between 10 and 19 years:

• Individuals who have been residents for 10 to 13 years will remain in scope for an additional 3 tax years.
• For each year of residence beyond 13, this period will increase by one additional tax year. For instance, an individual who has been resident for 15 out of 20 years upon leaving will remain liable for 5 years, while someone resident for 17 out of 20 years will be in scope for 7 years.

Once an individual has been non-resident for 10 years, the testing period resets. Individuals who have been deemed domiciled under the current rules, leave the UK, and become non-resident in the 2025-26 tax year, will revert to non-domiciled status after four years of non-residence.

For individuals aged 20 and younger, the criterion will be whether they have been UK resident for at least 50% of the tax years since their birth.

As is often the case, there will be both beneficiaries and those disadvantaged by these changes. Historically, many British expatriates have been concerned about severing ties with the UK to lose their UK domicile in favour of a foreign domicile. Under the new rules, they need only remain non-resident for ten years to achieve this status.

Lifetime gifts made before the implementation of the new rules will generally continue to be unaffected. IHT on an individual’s estate at death will consider gifts made in the seven years prior. A lifetime transfer of excluded property remains exempt from IHT, regardless of whether the individual becomes a long-term UK resident before death (at which point their remaining non-UK assets will no longer qualify as excluded property). Similarly, a lifetime transfer that did not constitute excluded property at the time of transfer will incur IHT if the transferor dies within seven years, regardless of their residency status at that time.

Starting from 6 April 2025, the option to elect for deemed domicile for IHT purposes will be revised. A spouse or civil partner of a long-term resident who is not themselves long-term resident may elect to be treated as long-term resident. This election is designed to avoid IHT implications on transfers to a spouse who is not a long-term resident and will remain effective until 10 consecutive tax years of non-residence have passed.

The FOTRA (Foreign Owners of Tax-Registered Assets) gilts rule will continue to apply.

While domicile may become less central in determining IHT, it will still hold significance in the contexts of succession planning and the application of double taxation treaties.

Current Rules Until 5th April 2025

Even if you were to become UK resident you may still retain the domicile of your country of origin, your domicile is the place where you maintain a permanent home and it is very difficult to alter.

When you are born you are given a domicile of origin and that will remain unless you make the change and obtain a domicile of choice. This is not a simple matter and requires you to cut all ties with country that was your original domicile. In an extreme case an attempt to do this failed when all ties had been cut, the country was never visited, but the individual had at some time expressed a desire to be buried there.

There are a number of factors that relate to your domicile, including how you are taxed in the UK. This could be on either on your UK and income sent to the UK only, or on your worldwide income.

The Remittance Basis

As a UK resident, the starting point for taxation is that you are taxed on your worldwide income, even if it is already taxed in the country in which it arose.  In most cases where a double tax treaty exists and you will get a credit for the tax paid abroad against the amount you owe in the UK, or in the other country for the UK tax paid.  Each treaty is different although most follow the OECD protocol and ensure that income is only taxed in one country or the credit is given to prevent double taxation if the income is taxable in both countries.

However, in addition to the above if you have a non UK domicile you can elect to only pay tax on the amount of income that arises in the UK and that which you remit to the UK, this is quite a complex scenario but in simple terms it means that you only pay UK tax on the income and capital gains that you send to UK, if you retain the income abroad you will not pay tax in the UK on it.

There are however other factors to consider. To elect to take the remittance basis means that you will forfeit your personal tax-free allowance currently £12,570 for the 2023/24 tax year.  In addition, once you have been resident for 7 out of 9 tax years you will face an annual charge of £30,000 per year and those here for 12 of the last 14 years will pay £60,000. From 5th April 2017 non-domiciled individuals suffer further change and once an individual has been UK resident in more than 15 out of the past 20 tax years, they will be deemed to be UK domiciled for all tax purposes, despite being a foreign domiciliary under general law.

It is worth noting that this charge can be paid out of offshore income and it will not count as a remittance provided it is paid directly to HMRC, there are certain rules to be followed for this exemption to apply.

The Remittance basis charge (RBC) is seen as an advance part payment of tax on your non UK income and as such you must nominate some income each year to which the charge may be attached.  There are complex rules to follow and lots of pitfalls if you get this wrong.  This nominated income must be identified and not be remitted to the UK before any other overseas income.  If it is there will be tax consequences.  You need only nominate £1 per year but the income must arise in the year and must be over £1.  On the other hand, the RBC is considered as tax paid in the UK so you may want to nominate more income in fact enough to cover the amount paid so that it can be allowed as double tax relief in another country.  

Deemed Domicile

Another factor is that from 5th April 2017 for all tax purposes you will be given a deemed domicile if you have been UK resident for 15 out of the last 20 years. With effect from the sixteenth (out of the last twenty) tax years of UK residence, an individual will no longer be able to benefit from the remittance basis and will instead be subject to UK tax on their personal worldwide income and gains on an arising basis.  They will also be liable to UK inheritance tax on their worldwide assets, not only those situated in the UK which is applied at 40% on all assets over the tax-free allowable amount which for 2023/24 is £325,000.

Services we offer

We are pleased to be able to offer the following taxation-based services:

• A General tax consultation and/or specific tax advice;

• Tax planning for your general situation or for a specific transaction;

• Registration for National Insurance and Unique Tax Reference numbers;

• Preparation and submission of annual self-assessment returns;

• Preparation and submission of return for overseas landlords;

• Formation of UK and offshore companies in respect to an acquisition of the commercial property and administrative and accounting services for corporate entities.

All taxation services are arranged on a fixed fee basis with the fee to be charged agreed in advance of any work being undertaken.

For all questions regarding your business in the UK and tax planning, please contact our Business Consultancy team at Law Firm Limited on +44 (0)20 7907 1460 or via email