Abolition of the Non-domicile Tax Regime from April 6, 2025

In the 2024 Autumn Budget, Chancellor Rachel Reeves confirmed changes to the current system for the taxation of non-UK domiciled individuals. Most notable among those changes was the abolition of the concept of domicile and its replacement with a “residence-based regime”.

Foreign Income and Gains (FIG) Regime:

Under this new regime, individuals coming to the UK can elect for their foreign income and gains (FIGs) to be free of UK tax for their first four years of UK residence provided they have not been UK tax resident for any of the previous 10 consecutive years prior to their arrival.

The FIG regime applies by reference to residence status only as the concept of domicile for tax purposes will no longer exist.

Electing to apply the FIG regime requires forgoing specific UK tax allowances, such as the personal income tax allowance and capital gains tax exemptions. There are also restrictions as to the availability of foreign income or capital lose. Those not eligible to elect for FIG treatment will be liable to UK tax on their worldwide income and gains even if they are kept offshore. However, tax credits may apply in line with existing double tax treaties. Additionally, foreign income and gains accrued under the previous remittance basis remain taxable if brought into the UK, and taxpayers will need to track any “mixed” accounts for funding UK expenses.

Transitional Measures for those currently Non-Domiciled in the UK:

Transitional arrangements are available for individuals currently using the remittance basis.

• Temporary Repatriation Facility (TRF): For those who previously used the remittance basis, foreign income and gains earned before 6 April 2025, can qualify for a reduced tax rate under TRF. This rate starts at 12% for sums brought back into the UK until April 6, 2027, rising to 15% thereafter.

• Trusts: Settlor and beneficiary remittances from non-UK trusts may qualify for TRF if income and gains were accrued before April 2025. There is also an option to rebase non-UK assets for capital gains tax purposes using values from April 5, 2017, available to those who used the remittance basis from 2017/18 onward.

Overseas Workday Relief (OWR):

Currently, non-UK domiciled employees receive tax relief on foreign-sourced income for the first three years if funds are kept offshore. From April 6, 2025, foreign employment income can be transferred to the UK tax-free within the four-year FIG window, capped at the lower of 30% of qualifying income or £300,000. OWR claimants are not eligible for UK income tax allowances or capital gains tax exemptions in the claim year.

Inheritance Tax (IHT) Revisions:

From 6 April 2025, IHT will be based on residency:

• 10-Year Exemption for New Residents: Newly arrived residents will be exempt from IHT on non-UK assets for the first 10 years of UK tax residence., After that IHT will apply to their worldwide assets.

• Post-Residency IHT Liability: Departing residents with extended UK residency will remain liable for IHT on worldwide assets based on their residency duration. For example, individuals with 10–13 years of residency will face a three-year IHT liability after departure, with an additional year added for each subsequent residency year. The extension to the IHT liability on departure is subject to a maximum of 10 years.

• Long-Term Resident Definition: The IHT framework will include specific rules for those meeting the long-term residency threshold, with transitional arrangements for those non-resident in 2025/26.

For trusts, IHT liabilities align with the settlor's residency status. Non-UK assets in excluded property trusts created before April 2025 remain exempt if the settlor was not UK domiciled at the time. Trusts from which the settlor can benefit face IHT upon the settlor’s death if they meet residency requirements. An exemption applies to assets added to excluded property trusts before October 30, 2024, allowing these assets to remain under existing IHT rules.

Preparing for Impact

For those impacted by the recent tax changes, now is a critical time to assess your tax situation and plan for how the new rules may affect you moving forward.

If you’d like to explore these changes further, you can contact David Gillies – Head of Tax at Friend Partnership - on 0121 633 2007, or alternatively email at david.gillies@friendllp.com