The UK’s 2024 Autumn Budget, to be delivered on 30 October by Chancellor of the Exchequer Rachel Reeves, may introduce tax changes to the taxation of non-domiciled individuals.
The current tax treatment of UK-resident non-domiciled individuals (non-doms) is expected to be abolished from 6 April 2025. In advance of the eagerly awaited Autumn Budget, we examine what we know about the new “foreign income and gains” (FIG) regime expected to replace the non-dom rules.
The Conservative government announced proposals in the March 2024 budget to abolish the current tax regime for non-doms. Subsequently, the Labour Party formed a new government and on 29 July released a policy paper confirming that they would abolish the tax regime for non-doms and replace it with a new residence-based regime effective 6 April 2025. Broadly speaking, the proposed changes are in line with what was previously announced by the previous Conservative government. However, the new Labour government views some Conservative government proposals as too generous and they may be scrapped.
The non-dom regime has formed part of the UK’s tax system for over 200 years. When the conditions are met, UK resident individuals whose permanent home is outside the UK have been able to benefit from “remittance-basis” taxation, which effectively exempts their foreign income and gains from UK taxation unless remitted to the UK. It has also offered protection from inheritance tax on their non-UK-sited assets. The rules have been adjusted and modified on numerous occasions, with the last big changes occurring in 2017, when a 15-year “cap” was introduced, limiting the number of years a non-dom could benefit under the rules.
The current remittance-basis regime is expected to be replaced with a residence-based test. The new regime would be available for up to four years starting from 6 April 2025, or the first tax year in which the individual becomes UK resident, if later. During those four years, new arrivals to the UK can elect not to pay UK tax on their FIG or on distributions from non-resident trusts. These can be brought into the UK freely without attracting a tax charge. Individuals can opt into the four-year FIG regime on a year-by-year basis but will lose their entitlement to personal allowances and annual exempt amounts for capital gains tax.
This new regime will be available only to individuals who have been non-UK residents for at least the previous 10 tax years, but qualifying individuals who have been tax resident in the UK for less than four tax years by 6 April 2025 will be able to use the FIG regime for any remainder of the four-year term. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents. It also appears that the FIG regime will apply to employees who were born in the UK but have been absent from the UK for 10 tax years or more.
The proposal by the previous Conservative government to provide existing non-doms who lose access to remittance basis taxation a 50% reduction on foreign income subject to tax in the 2025/2026 tax year now will not be introduced.
However, a Temporary Repatriation Facility (TRF) for FIG that arose to former remittance basis taxpayers before 6 April 2025 may still be introduced, although the rate of tax and the length of time the TRF will be available is not yet confirmed. The government has stated that the rate and length of time the TRF will be available will be set to make its use as attractive as possible.
Current and past remittance basis users will also be able to rebase foreign capital assets. The government is considering the appropriate rebasing date and will announce it in the Autumn Budget on 30 October 2024.
A form of overseas workday relief (OWR) will be retained. It is likely that employees who arrive in the UK after 6 April 2025 who haven’t been resident outside the UK for at least 10 UK tax years will no longer be eligible for OWR, but further details are expected to be confirmed in the upcoming budget. Currently, OWR is restricted to non-doms who have been non-resident in the three UK tax years prior to arriving in the UK. The government will engage with stakeholders over the next few months and further details are expected to be published in the Autumn Budget.
There will be no formal consultation on the proposals to bring in a residence-based test for inheritance taxes (IHT). Instead, the government will review stakeholder feedback and carry out further engagement over the summer so that any refinements of their proposals can be considered fully.
The new rules will apply to IHT on chargeable events that occur on or after 6 April 2025. The government envisages that the test for whether overseas assets are within the scope of IHT will be whether a person has been UK resident for 10 tax years prior to the year of the chargeable event. Once an individual meets this 10-year test, the individual will stay within the UK IHT net for the next 10 years, whether resident in the UK or not. Consequently, individuals would need to be non-UK tax resident for at least 10 years after leaving the UK to be outside the scope of IHT.
In addition, the use of Excluded Property Trusts to exempt overseas assets from IHT will end but it is likely that transitional arrangements for affected settlors of existing trusts will be introduced. More details on these rules, together with potential transitional arrangements, are expected to be published in the Autumn Budget.
If an individual leaves the UK temporarily during the four-year period, it is likely that they will be able to make a claim under the four-year FIG regime for any of the qualifying tax years remaining on their return to the UK, as long as they had been non-UK tax resident in the 10 consecutive years prior to their initial arrival.
Individuals who opt for the FIG regime will lose their annual exemption for capital gains tax purposes (currently GBP 3,000) and their personal allowance (currently GBP 12,570). This is also the case under the current remittance-basis rules, and internationally mobile employees earnings more than GBP 100,000 are already subject to the gradual reduction of the personal allowance to nil, once their earnings reach GBP 125,140.
We will need to wait until the budget is released for confirmation of the new OWR rules, but we anticipate no significant adverse impact to employers. We expect HMRC to allow applications for section 690 directions, or a new equivalent, so employers can operate PAYE on a reduced percentage of earnings for employees eligible for OWR.
Assuming OWR will still be available for three years, we expect no increased UK tax burden for employers of tax equalised or partially tax protected employees. The employer’s tax burden may in fact decrease due to the removal of the restriction on bringing foreign earnings to the UK.
Whilst the Labour policy paper provided some clarity, we will have to wait until the Autumn Budget for further details, particularly in relation to OWR.
The introduction of a residence-based regime brings additional considerations for those moving between jurisdictions and makes it all the more important to gain a full understanding of the residence rules in the UK and other countries, and how those rules interact. With BDO’s global network, we are well placed to have those conversations and provide coordinated advice.
While there is much still to be established, current non-doms, regardless of how long they have lived in the UK, should consider their position without delay.
For more information on potential changes to the taxation of non-doms in the UK, please consult your regular BDO contact or the author of this article.
Andrew Kelly
Charlotte Hobrough
BDO in United Kingdom
Abolishing Non-Dom Status – What Happens Now?
The current tax treatment of UK-resident non-domiciled individuals (non-doms) is expected to be abolished from 6 April 2025. In advance of the eagerly awaited Autumn Budget, we examine what we know about the new “foreign income and gains” (FIG) regime expected to replace the non-dom rules.
Update
The Conservative government announced proposals in the March 2024 budget to abolish the current tax regime for non-doms. Subsequently, the Labour Party formed a new government and on 29 July released a policy paper confirming that they would abolish the tax regime for non-doms and replace it with a new residence-based regime effective 6 April 2025. Broadly speaking, the proposed changes are in line with what was previously announced by the previous Conservative government. However, the new Labour government views some Conservative government proposals as too generous and they may be scrapped.
What is Non-Dom Status?
The non-dom regime has formed part of the UK’s tax system for over 200 years. When the conditions are met, UK resident individuals whose permanent home is outside the UK have been able to benefit from “remittance-basis” taxation, which effectively exempts their foreign income and gains from UK taxation unless remitted to the UK. It has also offered protection from inheritance tax on their non-UK-sited assets. The rules have been adjusted and modified on numerous occasions, with the last big changes occurring in 2017, when a 15-year “cap” was introduced, limiting the number of years a non-dom could benefit under the rules.
New FIG Regime
The current remittance-basis regime is expected to be replaced with a residence-based test. The new regime would be available for up to four years starting from 6 April 2025, or the first tax year in which the individual becomes UK resident, if later. During those four years, new arrivals to the UK can elect not to pay UK tax on their FIG or on distributions from non-resident trusts. These can be brought into the UK freely without attracting a tax charge. Individuals can opt into the four-year FIG regime on a year-by-year basis but will lose their entitlement to personal allowances and annual exempt amounts for capital gains tax.This new regime will be available only to individuals who have been non-UK residents for at least the previous 10 tax years, but qualifying individuals who have been tax resident in the UK for less than four tax years by 6 April 2025 will be able to use the FIG regime for any remainder of the four-year term. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents. It also appears that the FIG regime will apply to employees who were born in the UK but have been absent from the UK for 10 tax years or more.
Transitional Provisions
The proposal by the previous Conservative government to provide existing non-doms who lose access to remittance basis taxation a 50% reduction on foreign income subject to tax in the 2025/2026 tax year now will not be introduced.However, a Temporary Repatriation Facility (TRF) for FIG that arose to former remittance basis taxpayers before 6 April 2025 may still be introduced, although the rate of tax and the length of time the TRF will be available is not yet confirmed. The government has stated that the rate and length of time the TRF will be available will be set to make its use as attractive as possible.
Current and past remittance basis users will also be able to rebase foreign capital assets. The government is considering the appropriate rebasing date and will announce it in the Autumn Budget on 30 October 2024.
Overseas Workday Relief
A form of overseas workday relief (OWR) will be retained. It is likely that employees who arrive in the UK after 6 April 2025 who haven’t been resident outside the UK for at least 10 UK tax years will no longer be eligible for OWR, but further details are expected to be confirmed in the upcoming budget. Currently, OWR is restricted to non-doms who have been non-resident in the three UK tax years prior to arriving in the UK. The government will engage with stakeholders over the next few months and further details are expected to be published in the Autumn Budget.
Inheritance Tax
There will be no formal consultation on the proposals to bring in a residence-based test for inheritance taxes (IHT). Instead, the government will review stakeholder feedback and carry out further engagement over the summer so that any refinements of their proposals can be considered fully.The new rules will apply to IHT on chargeable events that occur on or after 6 April 2025. The government envisages that the test for whether overseas assets are within the scope of IHT will be whether a person has been UK resident for 10 tax years prior to the year of the chargeable event. Once an individual meets this 10-year test, the individual will stay within the UK IHT net for the next 10 years, whether resident in the UK or not. Consequently, individuals would need to be non-UK tax resident for at least 10 years after leaving the UK to be outside the scope of IHT.
In addition, the use of Excluded Property Trusts to exempt overseas assets from IHT will end but it is likely that transitional arrangements for affected settlors of existing trusts will be introduced. More details on these rules, together with potential transitional arrangements, are expected to be published in the Autumn Budget.
What Happens if Individuals Leave the UK and Return Later?
If an individual leaves the UK temporarily during the four-year period, it is likely that they will be able to make a claim under the four-year FIG regime for any of the qualifying tax years remaining on their return to the UK, as long as they had been non-UK tax resident in the 10 consecutive years prior to their initial arrival.
Downsides for Individuals Opting Into FIG Regime
Individuals who opt for the FIG regime will lose their annual exemption for capital gains tax purposes (currently GBP 3,000) and their personal allowance (currently GBP 12,570). This is also the case under the current remittance-basis rules, and internationally mobile employees earnings more than GBP 100,000 are already subject to the gradual reduction of the personal allowance to nil, once their earnings reach GBP 125,140.
What Does the FIG Regime Mean for Employers?
We will need to wait until the budget is released for confirmation of the new OWR rules, but we anticipate no significant adverse impact to employers. We expect HMRC to allow applications for section 690 directions, or a new equivalent, so employers can operate PAYE on a reduced percentage of earnings for employees eligible for OWR.Assuming OWR will still be available for three years, we expect no increased UK tax burden for employers of tax equalised or partially tax protected employees. The employer’s tax burden may in fact decrease due to the removal of the restriction on bringing foreign earnings to the UK.
Where Next for Non-Doms?
Whilst the Labour policy paper provided some clarity, we will have to wait until the Autumn Budget for further details, particularly in relation to OWR.The introduction of a residence-based regime brings additional considerations for those moving between jurisdictions and makes it all the more important to gain a full understanding of the residence rules in the UK and other countries, and how those rules interact. With BDO’s global network, we are well placed to have those conversations and provide coordinated advice.
While there is much still to be established, current non-doms, regardless of how long they have lived in the UK, should consider their position without delay.
For more information on potential changes to the taxation of non-doms in the UK, please consult your regular BDO contact or the author of this article.
Andrew Kelly
Charlotte Hobrough
BDO in United Kingdom