The recent Budget announcement confirmed several changes to the non-dom regime. Adam Bonell breaks down the key changes to prepare for before they roll out next spring.
From 6th April 2025, the remittance basis which is currently available to certain non-domiciled individuals in the UK will no longer be available for all taxpayers. The 6 key changes to note are as follows:
Individuals who have not been a UK tax resident in any of the previous 10 tax years are able to benefit from a new FIG regime.
Broadly speaking, the FIG regime allows those individuals to exclude certain sources of foreign income and gains from UK taxation in the first 4 years of UK tax residency.
The cost of claiming the FIG regime is the loss of the taxpayer’s personal allowance and Capital Gains Tax exemption, which is currently £12,570 and £3,000 respectively. A claim does not need to be made for each year, which allows for some planning opportunities.
Those who wish to utilise the FIG relief will need to report the excluded foreign income on their UK tax return, along with a claim for the relevant year(s).
The main pros and cons of the FIG regime versus the Remittance Basis are as follows:
| Positive | Negative |
| Not restricted to ‘Non Doms’ | A period of 10 consecutive tax years of non-UK tax residence is required to access the regime |
| No requirement to keep monies outside the UK | 4-year duration is considerably less than Remittance Basis. |
| Need to identify and report foreign sources on tax return. Significantly increasing the reporting burden over the Remittance Basis. | |
| Shorter time frame for claiming relief. |
Those who arrived before 6 April 2025 may be able to benefit from a measure of FIG, if they have already been a tax resident for less than 3 tax years on 5 April 2025. For instance, a qualifying taxpayer who arrived on 6 April 2024 (2024/25), would be entitled to access the FIG regime for the three years to 5 April 2028 (2027/28)
Tax residency in the UK is determined by the Statutory Residence Test (find out more here). Therefore, poor timing on arrival could result in accessibility to the FIG regime being restricted to 3 years, so it is important to take care whilst determining when UK tax residence commences.
Those in employment who claim FIG may also qualify for OWR, where they have duties of employment and some of those duties are performed outside the UK.
OWR allows an employee to apportion their earnings on a ‘just and reasonable’ basis, typically on a day spent basis, such that earnings attributable to the days spent working outside the UK aren’t subject to UK tax, and the claim is made on the employee’s tax return. However, relief can be provided directly through payroll mechanism, therefore allowing for a cash flow advantage.
The main pros and cons of the new OWR regime over the existing regime are as follows:
| Positive | Negative |
| No need to keep the earnings outside the UK. | The previously unrestricted relief will be capped at the lower of 30% of their qualifying employment income or £300k. |
| The relief has been extended by a further year, allowing qualifying individuals to benefit for up to 4 tax years (previously 3). |
Individuals who held foreign assets on 5 April 2017, who go on to sell those assets after 6 April 2025, may be entitled to rebase them for tax purposes, essentially allowing the taxpayer to substitute the actual cost of the asset for its market value on 5 April 2017.
However, there are conditions which need to be met. Most notably, the individual cannot have been UK domiciled (or deemed domiciled) at any time before 5 April 2025 and the asset must have been situated outside the UK from 6 March 2024 to 5 April 2025. In addition, they must have claimed the remittance basis in one of the tax years from 2017-2018 to 2024-2025.
A claim is not made if the remittance basis was automatic (normally where the sum of the foreign income and gains was below £2,000). Therefore, individuals who would benefit from rebasing who have not previously claimed the remittance basis now need to consider if they are in time to make such a claim. This may require the individual to trigger the payment of foreign income or gains before 5 April 2025.
Individuals who were already deemed domicile in the UK before 5 April 2025 do not qualify for rebasing but may be able to rebase under a previous rebasing facility.
Taxpayers who have previously utilised the remittance basis of taxation may have monies held outside the UK which cannot be enjoyed in the UK without triggering a tax charge.
From 6 April 2025, and for the following 3 tax years, those taxpayers can designate such monies and pay a one-off tax charge upon designation, allowing them to subsequently bring them to the UK. The rate applicable, regardless of whether it is income or gains, will be 12% over the two years ended 5 April 2027 extending to 15% if reported in the year ended 5 April 2028.
If a taxpayer is unsure of the origin of funds, for instance, whether it is income, they can treat it as income and pay the TRF, simplifying the procedure on what could potentially be a costly identification process.
No credit is allowed for any foreign taxes which may have been impacted by foreign income or gains, and no credit will be provided for taxes paid as part of the ‘remittance basis charge’. Whilst amounts will need to be reported on the individual’s tax return for the relevant year, monies do not have to be remitted in the year that the TRF tax is paid.
For existing remittance basis users, it may be beneficial to crystallise foreign income and gains before 5 April 2025, which are in turn designated under the TRF after 5 April 2025.
Under UK rules, IHT is potentially payable on value of the deceased Estate but may also include transfer within their lifetime. For instance, this could include transfers to a trust, or a company.
Broadly, for assets within the scope of IHT, the tax is payable at a rate of 40% on the value of the chargeable Estate above £325k. Currently, UK assets are within the scope of IHT regardless of the residency or domicile position of the owner at the time, and insofar this has not changed.
However, from April 2025 an individual’s worldwide Estate will fall within the scope of IHT where they have been a UK tax resident (as defined by the SRT) for at least 10 out of the last 20 years.
If the individual leaves the UK they will continue to be liable to UK IHT for up to 10 years, known as the ‘tail’. The tail will reduce depending on the length of time the individual has been a UK tax resident.
If the individual was a UK tax resident for more than 10, but less than 20 years, the tail is just 10 years. For those who are resident between 10 and 13 years, the tail is 3 tax years, thereafter the tail increases by one year for each additional year of residency.
Transitional rules will apply to those individuals who leave the UK permanently and are not UK tax residents for the 2025/26 tax year.
Transfers to spouses who share the same IHT profile are usually exempt from IHT. Spouses who are not ‘caught’ by the 10-year residency test might consider the benefits of electing someone to be treated as resident for IHT purposes, if this avoids an IHT liability on assets which pass from their deceased spouse.
There were material changes introduced for trusts which are ‘settlor’ interested. Such trusts were widely used by non-domiciled individuals as part of their estate planning.
Previously, certain foreign trusts could benefit from a ‘protected’ status, such that undistributed income and gains were not taxed on the settlor, despite that settlor retaining an interest in the trust. From 6 April 2025, such amounts will be taxed on the settlor regardless of distributions, unless the settlor qualifies for FIG.
Such trusts were also protected from IHT to the extent that they had ‘foreign assets’. From 6 April 2025, these trusts will be with the UK IHT regime, resulting in an IHT liability of up to 6% on every 10-year anniversary. In addition, if the trust was formed after 30 October 2024, the trust assets may also be treated as falling within the taxable estate of the settlor.
Care is needed when reviewing trust structures to see if they still achieve the intended results, and depending on the circumstances, it may be appropriate to collapse such structures before 5 April 2025.
The above is based on draft tax legislation and whilst we are not expecting material changes it is worth reviewing your circumstances carefully before taking (or refraining) from action.
Please do not hesitate to get in touch with Adam if you would like to find out more.
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