NEWS & VIEWS
Back in July, the newly elected Labour government outlined its planned reforms to the taxation of non-domiciled (non-dom) individuals, saying it would end the “preferential” tax treatment of foreign income and gains (FIG) based on the “outdated” concept of domicile.
Labour confirmed it would abolish the regime in the Autumn Budget on October 30 and outlined, in full, how the new, residence-based regime would work.
What does the new regime look like?
From April 6, 2025, new arrivals to the UK will be able to claim 100% relief on eligible FIG, provided they have not been UK tax resident in the ten years immediately prior to their arrival. After four years of UK residence, individuals will be subject to UK tax on their worldwide income and gains.
If any claim for the four-year FIG regime is made, the individual will lose their personal allowance and annual exemption for that tax year. They will also be unable to claim any foreign income losses or foreign capital losses arising in that tax year.
Claims are on a source-by-source basis and as such the taxpayer can choose what foreign income and what foreign gains on which to claim relief.
An individual’s ability to qualify for the four-year FIG regime will be determined by whether they are UK resident under the Statutory Residence Test.
Those who are still within their first four years of UK tax residence on April 6, 2025, and have not been UK tax resident in the ten years prior to their arrival, can access the four-year FIG regime until they have exceeded the four-year period.
What about former non-doms?
All former remittance basis users who are not eligible for the four-year FIG regime will pay tax at the same rates as other UK resident individuals on any newly arising FIG.
However, past remittance basis users will, for disposals on or after April 6, 2025, be entitled to rebase a personally held foreign asset for capital gains tax (CGT) purposes to its market value at April 5, 2017. This rebasing is on the condition that the individual was not UK-domiciled or deemed UK-domiciled at any time before tax year 2025/26.
A Temporary Repatriation Facility will also be available for individuals who have previously been taxed on the remittance basis. This will allow individuals to designate amounts derived from previously untaxed and unremitted FIG that arose prior to April 6, 2025, and pay a reduced tax rate. Designated amounts will be charged at a rate of 12% in tax years 2025/26 and 2026/27. The rate will rise to 15% in 2027/28.
What about inheritance tax?
A residence-based regime will also apply for inheritance tax from April 6, 2025.
An individual will be subject to UK inheritance tax (IHT) on non-UK assets if they have been resident in the UK for at least ten out of the last 20 tax years immediately preceding the tax year in which the chargeable event, including death, arises.
Where a person has been a UK resident for 20 years or more, they will remain in the UK IHT net for ten years after leaving. Individuals who have been resident for between ten and 13 years will remain in scope for three tax years. This will then increase by one tax year for each additional year of residence.
What about trusts?
The protection from tax on FIG arising within settlor-interested trust structures will no longer be available for non-dom and deemed domiciled individuals who do not qualify for and claim the four-year FIG regime.
FIG that arose in protected non-resident trusts before April 6, 2025, will not be taxed unless distributions or benefits are paid or deemed to be paid to UK resident who do not or are unable to make a claim for the four-year FIG regime.