In brief
The government has announced the abolition of non-domiciled status from 6 April 2025 with a new, simpler regime allowing tax relief on foreign income and gains for a limited period of UK tax residence only. As the proposed reforms are due to take place after the next General Election, it is not clear whether they will be implemented in this form. If they are, transitional measures will apply to non-domiciled individuals currently resident in the UK.
Background
The UK tax regime currently allows those who are non-domiciled in the UK to elect to be taxed on the remittance basis for certain types of foreign income and capital gains realised on non-UK situs assets. This regime was subject to major reforms in 2008 and 2017, which have eroded some of the tax benefits, by limiting the period over which the status can be claimed, and charging longer-term UK tax residents to access it.
The non-domiciled regime has been heavily criticised, as it depends on where taxpayers were born, where their parents were domiciled at the time of their birth, and taxpayers’ subjective intentions regarding their settled pattern of living: as such, it can be difficult to determine objectively. It is also complex and operates in a counter-intuitive fashion, by allowing tax breaks on monies left offshore and penalising bringing monies to the UK, where they could be spent or invested and generate other tax revenue (such as VAT).
In detail
The government has announced that it will abolish the non-domicile regime, with effect from 6 April 2025. Instead, individuals not UK tax resident in the previous ten years will be eligible for an exemption on all their foreign income and capital gains, for a fixed period. The exemption will apply regardless of whether the foreign income and/or gains are remitted to the UK. The new regime will be known as the foreign income and gains (FIG) regime.
The fixed period will comprise the first four UK tax years for which the individuals are UK tax resident. Once that period is over, individuals will only be eligible for further relief if they are not resident in the UK for a period of at least ten UK tax years.
The current system of overseas workdays relief is to be retained and will be reformed, but no details have been released apart from the period for which it is expected to apply, which is for the first three years of UK tax residence. It has also been confirmed that from 2025/26 the relief will not be conditional on income being retained outside the UK.
The proposals also include transitional reliefs:
- Non-UK domiciled individuals who lose access to the remittance basis on 6 April 2025 and who are not eligible for the new four-year FIG exemption regime, will enjoy a temporary 50% reduction in the personal foreign income subject to tax in 2025-26.
- Current non-UK domiciles claiming the remittance basis will be eligible to re-base their capital assets to 5 April 2019 levels for disposals that take place after 6 April 2025.
- Current non-UK domiciles claiming the remittance basis will be able to remit foreign income and gains that arose before 6 April 2025 to the UK at a rate of 12% under a new Temporary Repatriation Facility in the tax years 2025-26 and 2026-27.
- While the government is removing protections on non-resident trusts for all new FIG that arises within them after 6 April 2025, FIG that arose in protected non-resident trusts before 6 April 2025 will not be taxed unless distributions or benefits are paid to UK residents who have been here for more than four years.
Inheritance tax will also move from a domicile-based to a residence-based regime following a government consultation. To provide some certainty, the government has announced that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor before April 2025 will not change, so such assets will remain outside the scope of UK inheritance tax.
Deloitte view
We welcome the government’s decision to abolish the current non-domicile regime and replace it with a more modern, objective system, focusing on a shorter period of UK tax residence. Whether the proposals will come into force remains unclear but the commitment to reform seems likely to remain whatever government is in power in 2025.
