Measure

Government announces major reform of taxation of non-domiciled taxpayers

The measure

The existing tax regime that applies to non-UK domiciled individuals is to be abolished with effect from April 2025. It will be replaced with a residence-based system which will mean that new arrivers to the UK will be able to claim not to pay tax on their foreign income and gains during their first four tax years of residency, provided they have been non-UK resident for the previous ten tax years. Where a claim is made, personal allowances will be lost. 

Eligible employees will also be able to claim overseas workdays relief (OWR) in their first three tax years of residency, which provides UK tax relief in respect of employment income received in respect of overseas duties. This relief will no longer rely on the income earned being left offshore, but full details of the eligibility conditions that will have to be met for it to apply have yet to be released. Transitional arrangements for current UK resident non-UK domiciled individuals are to include:  

  • A two year repatriation facility to allow foreign income and gains arising in the tax years up to and including 2024/25 to be remitted to the UK and taxed at a flat 12% tax rate. Remittances made after the two year window will be taxed at standard income and capital gains tax rates.   
  • If the remittance basis has been claimed and the individual is neither legally nor deemed UK domiciled by 5 April 2025, there will be an option to rebase the value of foreign capital assets owned personally on 5 April 2019 to their value on that date. There will also be a temporary 50% exemption for individuals who were remittance basis users on the taxation of foreign income in the first tax year of the new regime (2025/26). Foreign capital gains in that year will be taxable in full.   
  • Business Investment Relief will remain available after 5 April 2025 for qualifying investments of foreign income and gains from remittance basis years. 

Trust protections are to be abolished. At a high-level, the intention is to tax settlors on both UK and foreign trust income and gains that arise from 6 April 2025 (unless the new four year regime applies), with no further tax on distributions made by the trustees. Pre-6 April 2025 foreign income and gains are to be taxable if matched to trust distributions, which HM Treasury comment could be to settlors or beneficiaries.

Draft legislation is to be published on the above points for technical consultation. The draft legislation will contain further detail on the above points.  

A consultation will be held on moving to a residence-based inheritance tax system. Whilst subject to consultation, the policy documents released today indicate that the new rules may involve charging inheritance tax on worldwide assets after ten years of UK residence and for deemed UK domicile to remain for ten years after leaving the UK.   

No changes to the existing rules will be made before April 2025. The existing system is to continue to apply to foreign property settled on foreign trusts before 6 April 2025 (note under existing legislation specific rules apply such that certain foreign assets that derive value from UK residential property are subject to inheritance tax). 

 

Who will be affected?

Current non-UK domiciled individuals who remain resident in the UK in 2025/26 and individuals who have arrived in the UK since 6 April 2022, or who come to the UK following these announcements, who have not been tax-resident in the UK in any of the 10 tax years prior to the year of arrival. 

 

When will the measure come into effect?

The income and capital gains tax changes will be effective from 6 April 2025. 

The inheritance tax changes are subject to consultation, but the government would like any new rules to apply from 6 April 2025.  

Our view

There will be a General Election before these changes are effective and ultimately, the policy reform is likely to be determined by whichever party forms the next government.  

The Treasury has estimated that the new scheme will raise an estimated £2.35 billion per annum across the first four years of operation, albeit it is not clear whether this estimate is based on predictions of current beneficiaries of the non-domicile regime remaining in the UK and the new scheme attracting more people to the UK. 

Tax free remittances during the first four years of UK residence will eliminate the need for bank account structuring, tracing and derivation rules for inbound UK residents.  Similarly, the 12% reduced transitional rate will simplify matters during the two year window it is available, although tracking of what is remitted during the window and afterwards will still be key. 

Removal of the protected trust regime, including for existing trusts, will mean affected individuals need to undertake a comprehensive review of their structures before 6 April 2025. 

The rules appear to be beneficial to individuals with a UK domicile of origin who have been resident out of the UK for a long period of time, where currently it is difficult to get certainty on their domicile, and therefore IHT, position.