The non-dom tax regime: changes ahead

In the Spring Budget on 6 March 2024, the Chancellor of the Exchequer announced that the existing UK tax regime that applies to UK tax resident individuals who are non-UK domiciled (“non-doms”) would be abolished from April 2025. 

What is domicile? 

Domicile is a common law concept which may impact on an individual’s UK tax position. In very broad terms, an individual is domiciled in their jurisdiction or place of belonging. This will generally be the place they have their permanent home and where they have the closest ties. The concept of domicile is separate from that of nationality or residence. An individual will always have one (and only one) place of domicile. Domicile can be acquired at birth, during a period of dependency or through an individual’s choices. Determining an individual’s place of domicile can be complex and involve analysing family heritage, personal intentions and several other factors. 

What is the current non-dom tax regime? 

Individuals who are tax-resident in the UK for a tax year are usually taxable on their worldwide income and gains by default – also known as the ‘arising’ basis of taxation. However, certain non-dom individuals who are UK tax-resident can be taxed on the ‘remittance basis’ instead. The remittance basis of taxation means that non-doms are taxed on their UK income and gains on the arising basis. However, their foreign income and gains are only taxed in the UK if they are brought to, received or used in the UK. 

Non-doms usually have to claim to be taxed on the remittance basis. After being UK tax-resident for seven of the previous nine tax years, non-doms must also pay an annual charge of £30,000 to continue to claim to be taxed on the remittance basis; the charge increases to £60,000 after being UK tax-resident for 12 of the previous 14 tax years. After being UK tax-resident for 15 of the previous 20 tax years, they are no longer able to claim to be taxed on the remittance basis, as they are then deemed to be domiciled in the UK for tax purposes. Individuals who are deemed to be domiciled in the UK will therefore be assessed to tax on the arising basis of taxation. 

What changes have been announced? 

The remittance basis of taxation will be abolished from 6 April 2025, i.e. the beginning of the 2025/26 UK tax year. 

Instead, a new tax regime will allow individuals moving to the UK after a period of at least ten years of non-UK residence to choose, for the first four years of UK residence, to be exempt from paying UK tax on any foreign income or gains; an exception to this is employment income relating to duties performed outside the UK which can only benefit from such exemption for three years. Any exempt foreign income or gains can be brought to the UK without any UK tax. 

After four years of UK residence, such individuals will then be subject to UK tax on their worldwide income and gains; this will also include income and gains in trusts from which they can benefit. The taxation of distributions received from trusts are also slightly amended but the full rules relating to trusts are complex and not covered here in any detail. Individuals will subsequently not be able to benefit from the new regime again unless they leave the UK for at least ten years. 

UK residence will be determined under the existing UK Statutory Residence Test which has applied since 6 April 2013. 

For inheritance tax, it is also intended that domicile will no longer be a primary connecting factor for determining who is liable to UK inheritance tax. Instead, it is intended that UK tax-residence will be a primary connecting factor for inheritance tax. Unlike for income and gains, it is proposed that liability to inheritance tax on worldwide assets will only apply after an individual has been UK resident for ten years. Once this applies, it will continue to apply even if they leave the UK, until after they have been non-UK resident for ten years. However, the government will consult publicly on the design of the new regime for inheritance tax so further details may be announced in due course. 

Are there any transitional rules for non-doms who will be affected? 

Some transitional rules have been announced to mitigate the impact of some of these changes. For the first year, the new regime applies in 2025/26, current non-doms who are moved to the arising basis of taxation under the new regime will only be taxed in the UK on 50% of their foreign income; this will only apply if they would have otherwise been able to claim to be taxed on the remittance basis.  

Although 100% of their foreign gains would be taxed from 2025/26, they can ‘rebase’ their foreign assets and thus only pay tax on gains calculated using the value of such foreign assets at 5 April 2019 subject to certain conditions. 

Also, for the 2025/26 and 2026/27 tax years, any personal foreign income or gains of non-doms that were previously untaxed due to application of the remittance basis can benefit from a reduced tax rate of 12% if they remit such funds to the UK in those two tax years – this is described as a ‘temporary repatriation facility’. From 2027/28 onwards, any remittances of such foreign income and gains will then be taxed at usual tax rates.  

What planning can be done and how can we help? 

These changes will affect many existing non-doms, both those who already live in the UK and those who may have been planning to move to the UK. The changes will be implemented by legislation in due course, and there will be some further consultation on the changes. 

The transitional rules are important and, with appropriate planning, may in the short term at least provide some opportunities and benefits for non-doms who are affected by these changes.  

There are also various structures that have been used by families for many years for asset protection and to provide for current and future generations; some of these structures will continue to give a measure of protection and will likely be key in any future planning to mitigate the effect of these changes.  

As always, what will be key for those affected by these changes is for them to review their current circumstances and explore the wider impact of the proposed changes on them and their families. 

Navigating change is always challenging but, as always, the best approach is to seek timely advice from qualified UK tax advisers who can assist in reviewing your own position, planning and provide guidance on the timing of implementation.  

Get in touch 

If you would like further advice on your situation, please contact Joseph Adunse or your usual Moore Kingston Smith contact.