In a significant announcement during this year’s UK Budget Speech, the Chancellor declared the imminent abolition of the longstanding “non-domicile” status, a key part of UK tax policy for over two centuries. This transformative decision signals a fundamental shift in the UK’s approach to taxation, highlighting the introduction of a new tax regime based on residency and scheduled to take effect from April 2025.
Understanding this change involves grasping two key concepts: domicile and tax residency.
Tax residency is determined based on the amount of time spent in the UK and other factors outlined in the Statutory Residence Test and can fluctuate based on an individual’s circumstances in a given tax year.
On the other hand, Domicile is determined based on factors such as your nationality, parental domicile and birth. Domicile is a permanent home base, indicating a more lasting connection to a particular jurisdiction. Domicile is (or was) a critical factor in determining an individual’s tax obligations and access to certain tax reliefs in the UK.
There are three types of domicile:
- Domicile of Origin – acquired at birth, usually following the father’s domicile,
- Domicile of Dependency – stems from the person they are reliant on.
- Domicile of Choice can be acquired by individuals over 16 who permanently relocate to the UK, with the intention of making it their permanent home.
Unlike residence, which can change frequently, domicile typically remains constant throughout an individual’s life.
For generations, non-domiciled individuals, commonly known as non-doms, have enjoyed a unique tax status in the UK, affording them a host of favourable tax treatments. Let’s delve into the tax treatments that non-doms have historically enjoyed:
Remittance Basis: Under this regime, non-doms had the option to pay tax on the remittance basis, allowing them to defer taxation on foreign income and gains until they were brought into the UK.
Overseas Workday Relief (OWR): OWR permitted non-doms to exclude a portion of their foreign employment income from UK taxation if they worked abroad for part of the year.
Business Investment Relief (BIR): Non-doms could invest their foreign income and gains into qualifying UK businesses under the BIR scheme without incurring a tax liability upon remittance.
Inheritance Tax (IHT) Planning: For IHT, an individual who is UK domiciled or deemed domiciled faces taxation on all their assets worldwide. On the contrary, those not domiciled in the UK are only subject to IHT on assets situated within the UK. Assets located outside the UK are considered excluded property for UK IHT purposes, thereby not forming part of the individual’s taxable estate.
Capital Gains Tax (CGT) Planning: Non-domiciled individuals can opt for the remittance basis, taxing only foreign income and gains brought into the UK. Gains from foreign assets are taxed when remitted, not when they initially arise.
With the abolition of domicile status, non-domiciled individuals will now be taxed according to their tax residency status in the UK. This means that many individuals currently classified as non-doms, who are also tax resident in the UK, will lose the foreign income protection reliefs they once enjoyed. Instead, they will be subject to taxation on their worldwide income and gains as tax residents. This significant shift underscores the importance for any impacted individuals to reassess their tax positions and financial planning strategies in light of the impending changes, ensuring compliance with the new tax regime while optimizing their tax liabilities.
Under the new tax regime, residency will serve as the primary determinant of tax liability. The transition to the new regime will be accompanied by a series of transitional rules and measures aimed at mitigating the impact on affected individuals:
Transitional Rules and Measures:
Foreign Income and Gains Regime: Under the new regime, individuals will not be taxed on their foreign income and gains for the first four tax years of UK residency, providing a grace period for newcomers to acclimate to the UK tax system. From the fifth year onward, individuals will be fully taxable in the UK on their worldwide income and gains.
Years of UK Residency: Years of UK tax residency under the statutory residence test prior to April 6, 2025, will be counted when determining eligibility for the new regime. However, split tax years and years of treaty residence will be disregarded for these purposes (i.e. a split year will be counted as a year of residency).
Transitional Relief: To ease the transition to the new regime, transitional relief measures will be introduced to provide temporary tax relief for affected individuals. For example, individuals paying tax on the remittance basis will be taxed on only 50% of their foreign income arising in the 2025/26 tax year, providing a gradual phasing-out of the remittance basis. More details are still to be promulgated.
Rebasing of Foreign Assets: Individuals who have claimed the remittance basis and are not UK domiciled or deemed domiciled by April 5, 2025, will have the option to rebase any chargeable assets held on April 5, 2019. This rebasing will establish the market value of the assets as of April 5, 2019, as the cost figure for capital gains tax calculations, mitigating the tax impact of the transition to the new regime.
Temporary Repatriation Facility: A temporary repatriation facility will be available for the 2025/26 and 2026/27 tax years, allowing individuals taxed on the remittance basis to elect to pay UK tax at a reduced rate of 12% on remittances of pre-April 6, 2025 for foreign income and gains. What this means in theory is that non-domiciled can remit a large portion of income at a lower tax rate, but should do the analysis to see whether this is worthwhile.
Who is likely to be impacted?
Those individuals most likely to be impacted by the new rules include:
- Individuals who currently use any of the non-domicile rules including the remittance basis;
- Individuals who may be able to claim a domicile of origin or dependency other than the UK to prevent their non-UK assets from falling into the inheritance tax net;
- Individuals looking to move to the UK either temporarily or permanently;
What is the potential impact?
If not carefully managed the new rules could create material tax liabilities for those impacted. This may particularly be the case for those with non-UK assets in countries without a double tax agreement with the UK or where an individual is thinking of moving to the UK either temporarily or permanently or for example where one has assets in a country where little or no Capital Gains Tax is paid even if does have a DTA with the UK.
How can I mitigate the impact of the new rules?
Contact us today to work through your personal situation and how to manage the new rules.
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Written by Victoria Lancefield