Non-Dom status abolished
The ins & outs

What constitutes non-domicile status?

For over two centuries, the non-domicile regime has been an integral part of the UK’s tax framework. When specific conditions are met, this regime allows UK-resident individuals whose permanent residence lies outside the UK to utilize the ‘remittance basis.’ This effectively exempts their foreign income and gains (FIG) from UK taxation unless these funds are remitted to the UK. Additionally, it provides safeguarding against Inheritance Tax for assets situated outside the UK. The regulations governing non-domicile status have undergone numerous adjustments and revisions, with significant changes implemented in 2017. Notably, a 15-year ‘cap’ was introduced, limiting the duration for which non-domiciled individuals could benefit from these rules.

The upcoming changes to the Foreign Income and Gains rules

Effective from 6th April 2025, the existing remittance basis regime will be replaced by a new residence-based test. This new framework will remain in effect for four years, commencing from 6th April 2025 or the initial tax year in which an individual becomes a UK resident, if later. It will be applicable to individuals who have maintained non-UK residency for at least the preceding ten tax years.

During this four-year period, individuals newly arriving in the UK will not be liable to taxation on their Foreign Income and Gains (FIG), nor on distributions from non-resident trusts. These funds can be brought into the UK without incurring any tax liabilities. However, individuals choosing to opt into the four-year FIG regime will forfeit their entitlement to personal allowances and annual exempt amounts for Capital Gains Tax (CGT).

Upon completion of the initial four-year period, individuals will be subject to taxation on their global income and gains, adhering to the standard tax regulations for UK residents.

Transitional provisions for current non-doms

For individuals currently holding non-domicile status who transition from the remittance basis to the arising basis on 6th April 2025, and do not meet the eligibility criteria for the four-year Foreign Income and Gains (FIG) regime, special provisions will be in effect for the tax year 2025/26. During this period, they will be subject to taxation on 50% of their foreign income for that year. Subsequently, beginning from the tax year 2026/27, foreign income will be taxed according to standard procedures.

For the tax years 2025/26 and 2026/27 exclusively, a reduced rate of 12% will be applicable to remittances of pre-6th April 2025 personal Foreign Income and Gains. This exemption does not extend to foreign income originating from offshore trust structures.

Effective from 6th April 2027, remittances of pre-6th April 2025 Foreign Income and Gains will be subject to taxation at standard rates. Those who historically claimed the remittance basis and remain neither UK domiciled nor deemed domiciled by 5th April 2025 will have the option of a Capital Gains Tax rebasing for non-UK sited assets held on 5th April 2019. However, the specific conditions of this provision are yet to be published. Business Investment Relief will continue to be accessible.

Impact on non-resident trusts

Starting from 6th April 2025, individuals who do not meet the criteria for the four-year Foreign Income and Gains (FIG) regime will no longer benefit from the tax exemption on income and gains within settlor-interested trust structures. Instead, any FIG arising in such settlements will be subject to taxation on the UK resident settlor or transferor on an arising basis. Foreign income and gains arising before 6th April 2025 will still be matched on a worldwide distribution basis.

Overseas workday relief

The provision of Overseas Workday Relief for the initial three years of residence will persist and will be contingent upon the individual’s choice to utilize the newly introduced four-year Foreign Income and Gains (FIG) regime.

Non-Dom Inheritance tax

There is a plan to transition from a domicile-based approach to a residence-based system for inheritance tax effective from 6th April 2025, with a consultation period preceding this change. Although specifics have yet to be finalized, it is anticipated that individuals who have been UK residents for ten years will be subject to inheritance tax (IHT), with the aim of maintaining their inclusion within the IHT framework for a decade after departing the UK. As it stands currently, assets situated in the UK will always be subject to IHT. Assets held by non-UK trusts, which enjoy ‘excluded property’ status, are currently anticipated to continue to fall outside the purview of inheritance tax (IHT).

Employers and internationally mobile employees (IMEs) – impact of non-dom changes

International Mobile Employees (IMEs) will have the option to opt into the FIG regime annually, allowing for flexibility. However, this decision entails the forfeiture of their personal allowance and annual exemption for capital gains tax.

What happens if IMEs leave the UK and return at a later date?

Should an individual temporarily depart from the UK during the four-year period, they will have the opportunity to invoke the four-year FIG regime for any remaining qualifying tax years upon their return. However, this provision will not extend to individuals who were residents in the 2023/24 UK tax year and resume UK tax residency from 6th April 2025 onwards, unless they have maintained non-residency in the UK for ten consecutive tax years prior to their return.

Are there any downsides for IMEs of opting into the FIG regime?

Choosing the FIG regime will result in the forfeiture of the annual exemption for capital gains tax, currently set at £6,000, as well as the personal allowance (PA), which stands at £12,570. This loss mirrors the conditions under the existing remittance basis rules. Moreover, International Mobile Employees (IMEs) earning over £100,000 already experience a gradual reduction of the PA to zero once their earnings surpass £125,140.

IMEs relocating to the UK from 6th April 2025, without a prior residency outside the UK for at least ten UK tax years, will no longer qualify for overseas workday relief or the broader advantages of the FIG regime. Currently, overseas workday relief is solely available to non-domiciled individuals who have been non-resident in the three UK tax years preceding their arrival in the country.

What does the FIG regime mean for employers of IMEs?

We anticipate that employers of International Mobile Employees (IMEs) will not experience any significant adverse effects. We anticipate that HM Revenue & Customs (HMRC) will permit applications for section 690 directions, or an equivalent measure, enabling employers to implement PAYE on a reduced percentage of earnings for IMEs eligible for Overseas Workday Relief (OWR).

Considering the availability of OWR for three tax years, we foresee no increase in the UK tax burden for employers of tax-equalized or partially tax-protected IMEs. In fact, the employer tax burden may decrease due to the removal of restrictions on bringing foreign earnings into the UK.

Employers should review their global mobility tax policies in light of the potential appeal to IMEs of remitting previously untaxed earnings as a result of the reduced 12% tax rate during the transition period. The timing of this remittance will be particularly pertinent to US-taxable IMEs due to considerations related to foreign tax credit claims for US tax purposes.

What lies ahead for non-domiciled individuals?

These changes represent significant shifts in the tax landscape for non-domiciled individuals. While there is a notion that the regime has been streamlined, the intricacies of the rules are likely to generate various scenarios with multiple layers of complexity. The transitional provisions afford some individuals the opportunity to organize their affairs before the implementation of the new rules.

Although much remains uncertain, we strongly advise all current non-doms, regardless of their tenure in the UK, to promptly assess their circumstances. Reach out to Naail & Co to explore your Non-dom options in further detail.

Non-Dom status abolished – The ins & outs
Non-Dom status abolished – The ins & outs

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