Abolishing non-dom status – what happens now?
Abolishing non-dom status – what happens now?
It has finally happened - the government has announced proposals to abolish the current tax treatment for UK resident non-domiciled individuals (non-doms) from 6 April 2025.
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This new regime will only be available to any individuals who have been non-UK resident for at least the previous ten tax years, but qualifying individuals who have been tax resident in the UK for less than four tax years by 6 April 2025 will be able to use the FIG regime for any remainder of the four-year term. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents.
For 2025/26 and 2026/27 only, a reduced rate (of 12%) will apply to remittances of pre-6 April 2025 personal FIG. This does not apply to foreign income arising within offshore trust structures.
From 6 April 2027, remittances of pre-6 April 2025 FIG will be taxed at the normal rates. A Capital Gains Tax rebasing of non-UK sited assets (held on 5 April 2019) will be available to those who have historically claimed the remittance basis and remain neither UK domiciled nor deemed domiciled by 5 April 2025. The conditions of this have yet to be published. Business Investment Relief will continue to be available.
Non-UK assets held by non-UK trusts which benefit from ‘excluded property’ status are currently expected to remain outside the scope of IHT.
What happens if IMEs leave the UK and return at a later date?
If an individual leaves the UK temporarily during the four-year period they will be able to make a claim under the four-year FIG regime for any of the qualifying tax years remaining on their return to the UK. However, this will not apply to anyone that was resident in the 2023/24 UK tax year and returns to establish UK tax residency from 6 April 2025 or later, unless they have been non-resident in the UK for ten UK tax years before they return to the UK.
Are there any downsides for IMEs of opting into the FIG regime?
Individuals who opt for the FIG regime will lose their annual exemption for capital gains tax purposes (currently £6,000) and their personal allowance (PA, currently £12,570). This is also the case under the current remittance basis rules, and IMEs earnings in excess of £100,000 are already subject to the gradual reduction of the PA to nil, once their earnings reach £125,140.
IMEs arriving in the UK from 6 April 2025 who haven’t been resident outside the UK for at least ten UK tax years will no longer be eligible for overseas workday relief, nor the wider benefits of the FIG regime. Currently, OWR is only restricted to non-doms who have been non-resident in the three UK tax years prior to arriving in the UK.
What does the FIG regime mean for employers of IMEs?
We envisage no significant adverse impact to employers of IMEs. We expect HMRC to allow applications for section 690 directions, or a new equivalent, so employers can operate PAYE on a reduced percentage of earnings for IMEs eligible for OWR.
Due to the three tax year availability of OWR, we expect no increased UK tax burden for employers of tax equalised or partially tax protected IMEs. The employer tax burden may in fact decrease due to the removal of the restriction on bringing foreign earnings to the UK.
Employers should revisit their global mobility tax policy in view of the potential attractiveness to IMEs of remitting previously unremitted (and untaxed) earnings as a result of the reduced 12% tax rate in the transition period. The timing of this will be particularly relevant to US taxable IMEs due to the way foreign tax credit is claimed for US tax purposes.
While there is much still to be established, we recommend that all current non-doms, regardless of how long they have lived in the UK, should consider their position without delay. Get in touch with an expert BDO adviser to discuss your own or your client’s options.
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What is non-dom status?
The non-dom regime has formed part of the UK’s tax system for over 200 years. Where the conditions are met, it has enabled UK resident individuals whose permanent home is outside the UK to benefit from the ‘remittance basis’, effectively exempting their foreign income and gains (FIG) from UK taxation unless remitted to the UK. It has also offered protection from Inheritance Tax on their non-UK sited assets. The rules have been adjusted and modified on numerous occasions, with the last big changes occurring in 2017, when a 15 year ‘cap’ was introduced, limiting the number of years a non-dom could benefit under the rules.The new Foreign Income and Gains rules
From 6 April 2025, the current remittance basis regime will be replaced with a new residence-based test. The new regime will be available for up to four years starting from 6 April 2025, or the first tax year in which the individual becomes UK resident if later. During these four years, new arrivals to the UK will not be subject to tax on their FIG, nor on distributions from non-resident trusts. These can be brought into the UK freely without attracting a tax charge. Those opting into the four-year FIG regime will lose their entitlement to personal allowances and annual exempt amounts for CGT.This new regime will only be available to any individuals who have been non-UK resident for at least the previous ten tax years, but qualifying individuals who have been tax resident in the UK for less than four tax years by 6 April 2025 will be able to use the FIG regime for any remainder of the four-year term. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents.
Transitional provisions for current non-doms
For those who currently hold non-dom status and move from the remittance basis to the arising basis on 6 April 2025, and do not qualify for the four-year FIG regime, special rules will apply for 2025/26 so they will be taxed on 50% of their foreign income for that year. From 2026/27 foreign income will be taxed in the normal way.For 2025/26 and 2026/27 only, a reduced rate (of 12%) will apply to remittances of pre-6 April 2025 personal FIG. This does not apply to foreign income arising within offshore trust structures.
From 6 April 2027, remittances of pre-6 April 2025 FIG will be taxed at the normal rates. A Capital Gains Tax rebasing of non-UK sited assets (held on 5 April 2019) will be available to those who have historically claimed the remittance basis and remain neither UK domiciled nor deemed domiciled by 5 April 2025. The conditions of this have yet to be published. Business Investment Relief will continue to be available.
Impact on non-resident Trusts
From 6 April 2025, the protection from taxation on income and gains within settlor-interested trust structures will be removed for those who do not qualify for the four-year FIG regime. Instead, FIG arising in such settlements will be taxed on the UK resident settlor/transferor on an arising basis. FIG arising pre-6 April 2025 will continue to be matched on a worldwide distribution basis.Overseas Workday Relief
Overseas workday relief for the first three years of residence will remain and will be based on whether the individual opts to use the new four-year FIG regime.Non-dom inheritance tax
There is an intention to move away from a domicile-based system to a residence-based system for inheritance tax from 6 April 2025 and there will be a period of consultation ahead of this. While nothing has been confirmed, it is envisaged that IHT will be charged on individuals who have been UK resident for ten years, with the intention to keep individuals within the scope of IHT for ten years after leaving the UK. As is the case now, UK sited assets will always remain within the IHT scope.Non-UK assets held by non-UK trusts which benefit from ‘excluded property’ status are currently expected to remain outside the scope of IHT.
Employers and internationally mobile employees (IMEs) – impact of non-dom changes
IMEs will be able to elect into the FIG regime on a year-by-year basis, but will lose their personal allowance and annual exemption (Capital gains tax).What happens if IMEs leave the UK and return at a later date?
If an individual leaves the UK temporarily during the four-year period they will be able to make a claim under the four-year FIG regime for any of the qualifying tax years remaining on their return to the UK. However, this will not apply to anyone that was resident in the 2023/24 UK tax year and returns to establish UK tax residency from 6 April 2025 or later, unless they have been non-resident in the UK for ten UK tax years before they return to the UK.
Are there any downsides for IMEs of opting into the FIG regime?
Individuals who opt for the FIG regime will lose their annual exemption for capital gains tax purposes (currently £6,000) and their personal allowance (PA, currently £12,570). This is also the case under the current remittance basis rules, and IMEs earnings in excess of £100,000 are already subject to the gradual reduction of the PA to nil, once their earnings reach £125,140.
IMEs arriving in the UK from 6 April 2025 who haven’t been resident outside the UK for at least ten UK tax years will no longer be eligible for overseas workday relief, nor the wider benefits of the FIG regime. Currently, OWR is only restricted to non-doms who have been non-resident in the three UK tax years prior to arriving in the UK.
What does the FIG regime mean for employers of IMEs?
We envisage no significant adverse impact to employers of IMEs. We expect HMRC to allow applications for section 690 directions, or a new equivalent, so employers can operate PAYE on a reduced percentage of earnings for IMEs eligible for OWR.
Due to the three tax year availability of OWR, we expect no increased UK tax burden for employers of tax equalised or partially tax protected IMEs. The employer tax burden may in fact decrease due to the removal of the restriction on bringing foreign earnings to the UK.
Employers should revisit their global mobility tax policy in view of the potential attractiveness to IMEs of remitting previously unremitted (and untaxed) earnings as a result of the reduced 12% tax rate in the transition period. The timing of this will be particularly relevant to US taxable IMEs due to the way foreign tax credit is claimed for US tax purposes.
Where next for non-doms?
These are significant changes to the tax regime for non-doms, and although there is a suggestion that the regime has been simplified, the rules will still produce a variety of scenarios with several layers of complexity. The transitional provisions provide time for some individuals to arrange their affairs before the new rules take effect.While there is much still to be established, we recommend that all current non-doms, regardless of how long they have lived in the UK, should consider their position without delay. Get in touch with an expert BDO adviser to discuss your own or your client’s options.