I am a recent arriver in the UK. Will the new non-dom tax regime apply to me?
The Chancellor confirmed in July 2024 that the changes to the taxation of non-UK domiciled individuals (“non-doms“) first announced by the Conservative government in the 2024 Spring Budget would go ahead and, following the Autumn Budget on 30 October 2024, many key aspects of this new regime have now been confirmed. From 6 April 2025, domicile will be abolished as a concept for UK tax purposes and the UK will move to a solely residence-based tax regime. At the same time, the “remittance basis” of taxation for non-doms (under which foreign income and gains (“FIG“) are only subject to UK tax if they are brought into – or “remitted” to – the UK) will be abolished for FIG arising on or after 6 April 2025. It is being replaced by a four-year residence-based FIG regime (“four-year FIG regime“) for certain qualifying individuals. Although this new four-year FIG regime is for a much more limited period than the current remittance basis regime, it can be more generous, in that time period, for those individuals who are able to benefit from it.
What will the four-year FIG regime involve?
- From 6 April 2025, for those who arrive in the UK in the 2025/26 year or later, there will be a strict four-year exemption period for their current-year FIG, starting from the first tax year of UK residence, provided the individual has been non-UK tax resident in the previous ten consecutive tax years.
- For those non-doms already in the UK in 2024/25, they will be able to benefit from the four-year FIG regime provided they had a period of ten consecutive tax years of non-UK residence prior to the tax year of their arrival in the UK and they are still within their first four years of UK tax residence in 2025/26. Such individuals will be unable to access the four-year FIG regime once they have exceeded the four-year FIG regime period.
- If an individual is UK resident in only some of that four-year period, it will not be possible to extend their exemption period by carrying forward any “unused” years to future tax years.
- The UK’s statutory residence test (“SRT“, for information on which please see here) will be used to determine whether an individual is UK tax resident when determining their eligibility to the four-year FIG regime. Any tax years in which the individual is treated as non-UK resident under an applicable double tax treaty with the UK (“treaty non-resident“) will still count as years of UK residence. If a tax year is a “split year” under the SRT or because the individual is treaty non-resident for part of the tax year, it will still be treated as a full year of UK residence when calculating the four-year FIG regime period.
- If an individual qualifies and claims under the four-year FIG regime on arrival but leaves the UK temporarily within their first four years, they can claim the four-year FIG regime for any of the qualifying tax years remaining on their return to the UK.
- Where an individual qualifies and claims exemption under the four-year FIG regime in respect of all their sources of covered FIG, there will be a full and unconditional exemption from UK income tax and capital gains tax on such FIG, whether these are brought into the UK or not. This is quite different to the operation of the current remittance basis, which limits UK tax to the extent of FIG that are remitted to the UK, subject to the individual paying a remittance basis charge of £30,000 or £60,000 from their seventh year of UK residence and depending on the duration of their UK residence.
- Unlike countries such as Italy and Greece who operate a similar exemption regime for FIG, there will be no annual or flat-rate charge to take advantage of the four-year FIG regime.
- To be taxed under the four-year FIG regime for a particular tax year, individuals will need to make a claim in their UK self-assessment tax return for each relevant tax year, on a source-by-source basis. They will need to quantify and disclose to HM Revenue & Customs the amount of FIG for which relief under the regime is being claimed. Any amounts of FIG left unquantified and undisclosed will be treated as chargeable and subject to UK tax at the individual’s marginal rates.
- If, on 5 April 2025, an individual is claiming Overseas Workday Relief (“OWR“) (which currently applies to remittance basis users in the first three years of UK residence where a proportion of their employment earnings relate to non-UK duties), the relief will continue to apply but it can now be claimed for up to four years so as to align it with the four-year FIG regime.
- Individuals who make a claim to be taxed under the four-year FIG regime or OWR will lose their income tax personal allowance and capital gains tax annual exemption for the relevant tax years. They will also not be able to claim any foreign losses arising in the year of their four-year FIG claim. Consequently, individuals will need to examine with their tax advisers year on year the financial merits of making a claim in each of the four years.
- Anyone can access the four-year FIG regime, including UK expats and those individuals born in the UK, if all the eligibility criteria are met.
Will I qualify?
To be eligible for the four-year FIG regime, non-doms will need to consider their UK tax residence status over the ten tax years prior to their first tax year of UK residence.
Example
If you became UK tax resident during the tax year 2022/23 you will need to consider your UK residence status going back to the 2012/13 tax year to determine if you are eligible to be taxed under the new four-year FIG regime in the 2025/26 tax year (which would be your fourth year of residence).
If you have been UK resident in any of the previous ten UK tax years, you will not be able to benefit from the four-year FIG regime, even if your current period of UK residence is less than four years. This means that even if you have successfully “re-set your domicile clock” under the current rules, you may not qualify for the four-year FIG regime.
What about trusts?
From 6 April 2025, UK resident beneficiaries of offshore trusts who qualify for, and claim under, the four-year FIG regime in respect of trust distributions or benefits they receive in covered years which constitute, or are matched to, the trust’s FIG, will not be taxed in the UK on those FIG. This is an attractive way to pass trust funds to beneficiaries in the UK which has previously required careful planning. However, as a result, FIG in trust structures will not be “washed out” through distributions or benefits provided to UK resident beneficiaries which are subject to a four-year FIG regime claim (i.e. in the beneficiaries’ first four years of UK residence) and will remain available for matching to future distributions or benefits. Similarly:
- where (and to the extent that) capital payments or benefits received by a UK resident beneficiary during the four-year FIG period remain unmatched, once the relevant four-year FIG period has come to an end and new FIG arises in the structure, the previously unmatched capital payments or benefits will become taxable in the tax year in which they are matched; and
- FIG arising within the trust during the four-year FIG period will remain available for matching to capital payments or benefits received by the beneficiary once the four-year FIG period has ended.
As above, beneficiaries will need to take advice on the extent to which they should claim the four-year FIG regime in any of the four years available, and trustees will need to liaise with them on this accordingly.
From 6 April 2025, UK resident beneficiaries who are not eligible for the four-year FIG regime (or who choose not to be taxed under this regime) will be taxed in the UK on the arising basis on distributions or benefits received from offshore trusts that are or are matched with FIG in the structure.
In terms of UK resident settlors who can benefit from an offshore trust they have created while non-doms, with the abolition of the “protected settlement” regime from 6 April 2025 (for more information on which, please see “Non-dom analysis: lets talk about trusts“), FIG that arise within the trust will, from 6 April 2025, be attributed to them for UK tax purposes, subject to certain defences applying. Current year FIG in the structure will, however, not be taxable on a settlor who qualifies and claims under the four-year FIG regime in respect of those sources of FIG, whether those FIG are remitted to the UK or not. Unremitted FIG arising before 6 April 2025 will be taxable on the settlor in the usual way upon remittance to the UK (subject to the availability of the “temporary repatriation facility” or “TRF” – as explained in “Non-dom reforms – the four year itch” and “Non-dom analysis – lets talk about trusts“).
For trusts with UK resident settlors who cannot claim the four-year FIG regime, the implications for them, and the trustees, of the new rules from 6 April 2025 will depend upon a number of factors, including the terms of the trust and the nature of the trust’s investments. The loss of protected settlement status for settlors is a big blow but there are some concessions. For example, settlors can offset personal losses against gains attributed to them from a trust. As above, settlors (and non-settlor beneficiaries) can also make use of the TRF to bring into the UK, at reduced tax rates, pre-6 April 2025 FIG in the structure that they have received, benefitted from or is attributed to them. For further analysis of the new rules applicable to trusts, please see “Non-dom reforms – lets talk about trusts“).
What now?
If you are already in the UK and plan to stay in the UK after 5 April 2025, you will need to consider if you will be eligible to be taxed under the four-year FIG regime (and would benefit from doing so), for all or part of your remaining qualifying years of UK tax residence.
If you will not qualify for the four-year FIG regime from 6 April 2025 but plan to stay in the UK, you will need to consider your position under the transitional rules and any planning that may be possible – please see our related article “Non-dom analysis – the four year itch“.
The analysis in this note is based on the new non-dom rules as announced in the Autumn Budget on 30 October 2024, as detailed in the government’s technical note published on 30 October 2024 and the draft legislation published on 7 November 2024. These have given clarity about the framework of the non-dom reforms, although technical changes may be introduced between now and the implementation of the rules on 6 April 2025.