Changing rules for non-doms – what to do now?

The Government has followed through on their plans to abolish the current rules for UK resident non-domiciled individuals from 6 April 2025. As expected, the existing regime will be replaced with a residence-based test that sees the introduction of a four-year foreign income and gains (FIG) regime and a ten out of twenty years residence regime for inheritance tax on non-UK assets.  

Get your current domicile status checked – it is still important 

Although the rules are changing, non-domicile status remains key for earlier years, the current tax year as well as future years when the Transitional Repatriation Facility (TRF) may be beneficial. HMRC can enquire into earlier years and challenge claims made that rely upon your non-UK domicile status. You may wish to claim the remittance basis this year. In addition, domicile status will still have relevance when considering the inheritance tax implications for assets held in trusts. 

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 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 also offered protection from Inheritance Tax on their non-UK sited assets. The rules were 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. Under the Labour Government, the existing non-dom regime was abolished in the 2024 Autumn Budget. 

Foreign Income and Gains (FIG) regime for non-doms 

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 four years starting from 6 April 2025 or the first tax year in which the individual becomes UK resident if later. It will be available to any individuals who have been non-UK resident for at least the previous ten tax years.   

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. This means that the regime will be available to former UK residents who have been non-UK resident for ten years or more.  

During these four-years, new arrivals to the UK will not be subject to tax on their foreign income and gains, nor on distributions from non-resident trusts - these can be brought into the UK freely without attracting a tax charge. Once the four-year period is over, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents.  

A claim needs to be made by 31 January of the second tax year following the relevant tax year and it is necessary to nominate all sources of FIG that you wish the rules to apply to. Separate claims must be made for income and gains, although a claim for either or both means that those opting into the four-year FIG regime will lose their entitlement to income tax personal allowances and annual exempt amounts for capital gains tax.  

Temporary Repatriation Facility (TRF) 

With the introduction of the four-year FIG regime there will be some transitional provisions for existing non-doms.  Making an election under the TRF is not necessarily appropriate in all circumstances and advice should be sought on whether, when and how to use this in the most beneficial way. 

UK resident individuals who have previously claimed the remittance basis and have unremitted FIG arising before 6 April 2025 can elect to designate all or part of the FIG, and pay tax at a reduced rate to bring these amounts to the UK. The rate of tax is 12% for the tax years 2025/26 and 2026/27 and then 15% for the tax year 2027/28, and it is not necessary to physically move the funds to the UK during this time period. The tax will be due on the full amount of FIG designated in the year the election is made - not when the funds are brought to the UK. 

The TRF will also apply to unremitted FIG invested in assets. It is possible to designate amounts where the source cannot be ascertained. Stringent record keeping will be required to comply with HMRC compliance checks.   

The TRF is also available to UK resident individuals (settlor or beneficiary) who receive a benefit from an offshore trust structure during the same time period, where the benefit is matched to pre- 6 April 2025 FIG. This should mean easier access to trust income and gains which previously may have been subject to punitive tax rates on extraction from trusts.  

The TRF can also apply to FIG where a claim for business investment relief (BIR) has been made. From 6 April 2028 when the TRF period ends, it will no longer be possible to claim BIR on any new investments, or reinvestments.  

Rebasing   

A capital gains tax rebasing of non-UK sited assets will be available to those who have historically claimed the remittance basis for any tax from 2017/18 onwards but cannot benefit from the four-year FIG regime. Assets will be rebased to their market value as at 5 April 2017.   

These rebasing provisions will not be available for individuals who became UK domiciled or deemed domiciled prior to 6 April 2025. Rebasing will also not be available to assets held in trusts or companies.  

For historic remittance basis users who have relied on the previous rebasing provisions, it will still be possible to rebase assets to 5 April 2017 on disposal, provided they remained non-UK domiciled under general law in the period to 5 April 2025. This does, however, leave a group of non-UK domiciled taxpayers who became deemed domiciled at some point between 6 April 2017 and 6 April 2025 who will not benefit from any rebasing regime.  

Non-doms and offshore 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 these settlements will be taxed on the UK resident settlor/transferor on an arising basis. This will also include FIG within underlying companies but subject to whether any commercial motive defences apply under the transfer of assets abroad provisions.  

Non-dom inheritance tax  

The UK will move to a residence-based system from 6 April 2025 that will see IHT being charged on worldwide assets for individuals who have been UK resident in ten out of the last twenty tax years. Such individuals will remain within the scope of IHT for up to ten years following exit from the UK, and the IHT ‘tail’ will depend on how long they were resident in the UK.   

For example, if an individual has been UK resident for between ten and thirteen years, they will remain within the IHT net for three tax years. This is then increased by one year for each additional year of residence. Those who have been UK resident for twenty years will be subject to IHT for ten years after exit.   

This should mean that individuals with a domicile in the UK (such as British expats) will be outside the scope of IHT on non-UK assets if they have not been UK resident for ten out of the last twenty tax years.   

UK assets will remain within the scope of IHT for all individuals irrespective of residence status.   

Changes to the UK IHT rules on business assets (ie the future loss of 100% relief for the transfer of qualifying business or agricultural assets) may also need to be considered where a non-dom holds such UK assets personally or in trust. Read more here.

Transitional rules  

Special rules will apply to individuals who are non-UK resident for the 2025/26 tax year. They will be treated as long term-resident only if, on 6 April 2025, they are deemed domiciled under the existing 15/20 rule and are resident for one of the four tax years following exit.    

Excluded Property Trusts  

Though the concept of domicile is said to be abolished, it will still have relevance when considering the inheritance tax implications for assets held in trusts.   

From 6 April 2025, trusts created by a non-UK domiciled individual under common law before 30 October 2024 (and who was also non deemed domiciled under the existing 15 out of 20 year regime when the trust was established), will have non-UK situs assets within the trust treated with features from the existing excluded property regime, and features of the relevant property regime which would normally apply to UK domiciles.  

In broad terms, the gift with reservation of benefit rules which usually deem trust assets to be within the Estate of a settlor upon death, will not apply for non-UK domiciled settlors with pre-existing trusts holding non-UK situs assets. Instead, the trust will be subject to ten-yearly periodic and exit charges (at a rate of 6%), depending on whether the settlor is a long-term resident under the new ten out of twenty-year rule. It would appear this rule can apply even if the settlor is no longer resident as of 6 April 2025. When the settlor ceases to be long term UK-resident, the trust will be subject to an exit charge up to 6% of the value of the trust assets.  

Overseas Workday Relief 

Despite the abolition of the non-dom regime, Overseas Workdays Relief (OWR) will remain available for internationally mobile employees (IMEs) beyond 6 April 2025. The draft legislation for the relief aligns it with the same four-year period that the Foreign Income and Gains (FIG) regime can be accessed.    

New IMEs arriving in the UK after 6 April 2025 will be eligible if they have not been resident in the UK for 10 prior UK tax years, even if they are repatriating Brits. Gone is the core requirement to have sufficient earnings paid and retained offshore to claim OWR, but an annual financial limit will apply: the lower of 30% of qualifying employment income or £300k per tax year. Transitional reliefs will apply for those who arrived pre-April 2025 but are only part way through the previous 3-year period of OWR eligibility.   

Although employers are assured by HMRC of a ‘simpler’ process to notify HMRC that they wish to operate PAYE only on the portion of earnings relating to UK workdays for employees claiming OWR, there are new complexities. The change to a ‘process now, check later’ approach means HMRC could retroactively direct employers to amend the portion of earnings to which PAYE is applied. Also, the new financial limit, and the way this limit applies to incentive payments for performance periods spanning earlier UK tax years, may require employers to simultaneously monitor current and prior tax year limits. ‘Trailing income’ (equity and bonus) part earned prior to the new rules will still need to be paid offshore into a qualifying account to benefit from OWR.  

The exemption to travel costs incurred by non-dom employees that are funded by employers when they come to the UK, and periodic travel back to their home country will be reduced from its current 5 years to 4 tax years after 5 April 2025.  

What does the FIG regime mean for employees? 

The FIG regime will apply to employees who were born in the UK but have been absent from the UK for 10 tax years or more. Employees will need to be clear in relation to pre-April 2025 earnings period incentive awards which will remain subject to the remittance basis rules. They will also have to become familiar with how the annual financial limits will operate. For highly remunerated executives earning over the financial limit the consequence of triggering UK tax residency will be more significant than in the past. 

What does the FIG regime mean for employers? 

The most significant adverse impact to employers is the annual financial limit which will apply on OWR for highly remunerated executives that are tax equalised on assignments to the UK; that will result in additional cost to the employer. We expect HMRC to allow notifications for section 690 directions, or a new equivalent, so employers can operate PAYE on a reduced percentage of earnings for employees eligible for OWR. 

Since OWR will still be available for four years, there is no increased UK tax burden for employers of tax equalised or partially tax protected employees whose earnings do not exceed the annual financial limit. The employer tax burden may in fact decrease due to the removal of the restriction on bringing foreign earnings to the UK. 

Given the complexities of the new rules, many internationally mobile employees will expect their employer to facilitate and or fund tax guidance on how the changes will impact them. Equally it would be in employer’s interests to review the impact of the new rules on their current and future internationally mobile employees to ensure that unforeseen issues are minimised. 

Get expert advice 

We recommend that all current non-doms, regardless of how long they have lived in the UK, should consider their position without delay, in particular reviewing domicile status. Get in touch with an expert BDO adviser to discuss your own or your client’s options.

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