Non-domcile Status - Detailed Summary of Upcoming Changes

It has been the Labour Party’s long-standing intention to abolish non-domicile (‘non-dom’) status for tax purposes. Conservative Chancellor Jeremy Hunt, in the March 2024 Budget, took up this idea and announced that the rules would undergo fundamental reform from 6 April 2025. Unsurprisingly, Rachel Reeves has confirmed that this will still go ahead, albeit with a few tweaks to what the Conservative government had announced and a tougher set of provisions to deal with offshore trust structures (a topic that we will not discuss further here).

It is essential that anyone who may be affected by the proposals gets specialist advice, as the taxation of non-doms is a notoriously complex area.

We will not attempt to cover all the detail here, but in this guide, we will explain:

• the current rules for non-doms; 
• how the rules are changing (including differences from what the Conservatives proposed); and
• various transitional rules that will apply

What is “domicile”?

Domicile status is a difficult legal issue that is very important for tax. Very broadly, it is one’s country of natural or permanent home, which of course may be different to where someone is resident at any given time. To establish domicile status, the courts will look at where a taxpayer’s parents (and sometimes grandparents) were domiciled, as well as the taxpayer’s future intentions. There is a lot of case law in this area, partly because of the importance of domicile status for Inheritance Tax (IHT) purposes, as explained below.

Remittance basis

Currently, if someone is UK-resident but domiciled outside the UK, they can claim ‘remittance basis’ on their tax return. This means that their foreign income and capital gains will not be taxable in the UK unless brought here. 

Once someone has been resident here for 7 of the previous 9 years, they have to pay an annual fee (the ‘remittance basis charge’) of £30,000 to use remittance basis; this increases to £60,000 when someone has been here for 12 of the previous 14 years. However, once someone has been resident for 15 of the last 20 years, they become ‘deemed domiciled’ in the UK, at which point remittance basis is no longer available. This means that their worldwide income and gains are taxable in the UK, even if the funds are left overseas. This is referred to as being taxable on an ‘arising’ basis and is also the basis of taxation for non-doms that do not claim remittance basis.

Inheritance Tax 

The other advantage of non-dom status is that for IHT, only UK assets come within the scope of the tax; foreign assets are ‘excluded property’. In contrast, those who are UK-domiciled are subject to IHT on their worldwide assets. For example, if a non-dom dies owning shares in an Indian company and a holiday home in France, neither asset will be subject to UK IHT. If they are owned by a UK-domiciled or deemed domiciled taxpayer, they will be subject to UK IHT.

From 6 April 2025, whether your foreign assets are subject to UK IHT or not will be determined by how long you have been UK resident (as we will discuss below), irrespective of your domicile status. 

(Note that the idea of domicile itself will still exist and will be relevant for certain other legal matters, such as probate law, even though it will be irrelevant for UK tax purposes. It also appears that where double tax treaties with other jurisdictions use the legal concept of domicile, the domicile status of an individual will continue to be important.)

The new residence-based regime

The key changes that are in the Autumn Finance Bill are set out below. Note that, until the Finance Bill is enacted (probably early in 2025), it is possible that some of the provisions will be amended.

The new FIG regime

From 6 April 2025, the current remittance basis of taxation will be abolished for UK resident non-doms. This will be replaced with a new 4-year foreign income and gains (FIG) regime, for individuals who become UK tax resident after a period of 10 tax years of non-UK residence. Note that, unlike remittance basis, this regime will be available to a UK domiciled individual who has been non-resident for 10 years but has now returned to the UK.

Qualifying individuals: 

• will be able to claim relief from UK tax for any foreign income and gains arising in the first 4 years of their UK tax residence (a separate claim being needed for each year); and 
• will be able to bring these funds to the UK free from any additional charges (i.e. the funds do not have to be left overseas to benefit from this FIG exemption).
• Those benefitting from the FIG regime will still pay tax on UK income and gains, as is the case for non-domiciled individuals currently.

An individual can claim only for income, only for gains or for both. They will need to: 

• make a claim for each source of income and/or gain on which relief is being sought; and
• include this income and gains on their tax return.

Individuals who claim relief under the four-year FIG regime will lose entitlement to the personal allowance for income tax and the annual exempt amount for CGT (as happens with most remittance basis claimants currently). For 2025/26, these allowances remain at £12,570 and £3,000 respectively. The loss of these allowances may affect an individual’s tax liability on their UK income, so taxpayers with only small amounts of foreign income or gains may choose not to use the FIG regime. 

There is a long list of the income and gains that will qualify (or otherwise) for the FIG regime. Note that gains on offshore life insurance bonds (a relatively commonly held investment by non-doms) will not qualify.

UK residents who have arrived recently

Individuals who, on 6 April 2025, have been tax resident in the UK for less than 4 years (following 10 years of non-UK tax residence) will be able to use this new regime for any tax year of UK residence in the remainder of those 4 years. For example, if someone has become UK resident in the current tax year (2024/25), they will be able to use the FIG regime for the following 3 tax years.

There are certain circumstances in which a tax year is split into periods of non-residence and residence (e.g. when returning part-way through a year after working full-time abroad). These will count as one of the four qualifying years, as will a year where someone is resident under our statutory residence tests but treated as non-resident under a tax treaty that the UK has with another jurisdiction.

Other existing UK residents

Non-doms who, from 6 April 2025, are not eligible for the new 4-year FIG regime (i.e. they have been here for more than four years) will be fully taxable on income and gains on an arising basis for 2025/26 and subsequent years. The Conservatives had proposed that, as a transitional rule, only 50% of these individuals’ foreign income would be taxable in 2025/26, but Labour is not taking up this proposal.

Those who have previously claimed remittance basis

Where a non-dom has claimed remittance basis for a particular tax year, the foreign income or gains of that year become taxable whenever remitted to the UK. This will remain the case, even after the ability to claim remittance basis ends on 5 April 2025. The extremely detailed record keeping that remittance basis requires (to enable HMRC to determine what is being remitted at any given time) will, therefore, still be relevant for many years (and in some cases decades) to come.

Temporary Repatriation Facility (TRF)

To encourage non-doms to remit foreign income and gains that have previously been the subject of a remittance basis claim (and therefore produce extra tax revenue for the Exchequer), the new Government has taken up the Conservatives’ idea of a TRF but have extended it from two years to three. From 6 April 2025, individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on pre-6 April 2025 foreign income and gains in tax years 2025/26 and 2026/27; for 2027/28, the rate will be 15%.

Individuals will be able to designate amounts that either are, or derive from, foreign income and gains arising prior to 6 April 2025. Amounts designated will need to be included on tax returns and any tax will be payable in that year. These amounts can then be remitted to the UK at any time without further tax and without any report made to HMRC.

Capital Gains Tax Rebasing

For disposals after 6 April 2025, there will be rebasing available for personally held foreign assets of current and past remittance users. 

To qualify, individuals:

• cannot have been either UK domiciled or deemed domiciled at any time before tax year 2025/26; and 
• must have claimed the remittance basis in one of the tax years 2017/18 to 2024/25.

Assets will be rebased to their market value on 5 April 2017 (not April 2019, as proposed by the Conservatives). This will reduce CGT charges on eventual disposal, where the 5 April 2017 value is higher than original cost. If rebasing is not beneficial, original cost can still be used.

Note that non-doms who have not previously claimed remittance basis, probably due to having low foreign income and gains, may wish to claim it for 2023/24 or 2024/25, in order to enable rebasing of their foreign  assets and thus reduce subsequent CGT charges.

A new residence-based IHT regime

From 6 April 2025, the test for whether foreign assets owned by individuals are within the scope of IHT will be whether or not the individual is a ‘long-term resident’. The changes will not affect the taxation of UK assets (including indirectly owned UK residential property), which will remain within the scope of IHT, regardless of the individual’s residence status.

Long-term resident (LTR)

The conservatives had proposed that a LTR would be someone who has been resident in the UK for 10 consecutive tax years. Labour has broadened this, such that a long-term resident is defined as an individual:

• older than 20; and
• who has been resident in the UK for 10 out of the20 tax years before the one in which any transfer (e.g. on death) takes place.

Split years and years of treaty non-residence will count as full years of UK residence. 

For individuals who are 20 years old or younger, the test will be whether they have been resident in the UK for 50% of the tax years since their birth.

It is worth noting that our statutory residence rules were only introduced for tax year 2013/14, so to determine whether someone is within the scope of IHT on their foreign assets (where the look-back period for residence is 20 years), you may have to consider the old, non-statutory rules.

LTRs becoming non-resident

Under current rules, UK doms remain subject to IHT on their worldwide assets for three years after becoming non-domiciled in the UK. This is to stop someone who is terminally ill or in very poor health taking steps to:

• switch all their assets to foreign assets; and
• become non-UK domiciled (broadly, by severing their ties with the UK and creating a new permanent home overseas), then dying shortly afterwards with no UK assets.

Under the new IHT regime, LTRs will be governed by the so-called ‘tail’ provisions (i.e. the amount of time a previous LTR will remain within the scope of UK IHT on foreign assets once they become non-UK resident). 

This will remain at 10 years (as proposed by the Conservatives) for those who have been resident in the UK for 20 years or more, but for those who have only been UK resident for between 10 and 13 years, the tail will be much shorter (three years). This then increases by one year for every year of residence, until it hits the maximum of ten at 20 years. 

The effect of these rules is that, after 10 years of UK residence, the longer an individual has been UK resident, the longer the ‘tail’.

Note that these rules apply equally to UK domiciled individuals living abroad, who will now have certainty that their non-UK assets will fall outside the scope of UK IHT once they have been non-UK resident for 10 tax years.

Transitional rules

Transitional rules are in place for individuals who have previously been UK resident but are non-UK resident in 2025/26

• Deemed domiciled individuals will essentially be subject to the current three-year IHT tail.
• Non-doms who would not have been deemed domiciled under the old rules (i.e. not UK resident in 15 of the previous 20 years) will not be subject to the 3-year tail rule. 

In both cases, this applies provided they remain outside the UK; if they return to UK residence, then the new rules will apply.

Overall IHT impact on individuals

For an individual, becoming a LTR will mean becoming subject to IHT on their worldwide assets owned outright. However, a lifetime transfer of excluded property (non-UK assets of a non-LTR) will remain outside the scope of IHT, even if the individual becomes a LTR by the time of their death within the seven-year period for which lifetime gifts before death become chargeable to IHT. 

In contrast, a lifetime gift of non-excluded property will remain chargeable at death, if the transferor dies within seven years, even if they have ceased to be a LTR at the time of their death.

Conclusion

These fundamental reforms will have a big impact on: 

• anyone from overseas; 
• UK domiciled individuals thinking of returning to the UK; and 
• UK residents who are thinking of emigrating.

All such individuals should consider how these changes will affect their tax liability in the UK and take specialist advice, if necessary, particularly if they have offshore trust structures in place. 

You can get in touch with our tax specialists here at Friend Partnership on 0121 233 2000, e-mail at enquiries@friendllp.com, or complete the enquiry form below.

*This article was originally published by Monitor Information Limited and reproduced with their permission.