AUTUMN BUDGET 2024 - Changes to the taxation of non-UK domiciled individuals

Key Points

• Current UK remittance basis rules are to be abolished from 6 April 2025
• Introduction of residence-based rules to determine exposure to UK tax
• Inheritance tax: move from a domicile-based system to a residence basis system

Abolition of Remittance Basis

The Labour Government has confirmed that there will be a wholesale change in the way so-called ‘non-doms’ are to be taxed, to take effect from April 6 2025. While the new system will be broadly similar to the one announced by Jeremy Hunt in the Spring Budget, there are some differences.

As expected, the remittance basis of taxation, which enabled certain non-UK doms to avoid paying tax on their non-UK income and gains provided they were not brought into the UK, will be abolished. Whilst these changes will impact future arrivals to the UK, the most significant impact will be on those non-doms currently residing in the UK who have been claiming the remittance basis.

The New Four-year Foreign Income and Gains Regime

From 6 April 2025, a completely new system will come into effect which focuses solely on the residence position of taxpayers. This new foreign income and gains (FIG) regime will be available to individuals in the first four tax years after becoming UK tax residents, provided that they were previously non-UK residents for at least ten years.

Where the FIG regime applies, individuals will only be taxed on their UK source income and gains. Unlike the current remittance basis regime, foreign income and gains arising in that period will be completely exempt from UK tax, even if brought to the UK and spent here.

While this new regime is not as generous as the current remittance regime, it will arguably be beneficial for some. For instance, individuals who are UK-domiciled will be able to use the FIG regime provided that they have been non-UK residents for at least 10 years before their return to the UK.

Transitional rules and potential planning opportunities

The previously proposed transitional measure of non-doms being assessed on 50% of their foreign income in the first tax year of the new rules has been scrapped. However, Overseas Workday Relief will continue to be available to employees provided that they are eligible for the new FIG regime but will now be based on residence alone and has been extended to the first four tax years of UK residence.

Temporary Repatriation Facility (TRF)

The rules for remitting pre-5th April 2025 income and gains are to be relaxed for the first three tax years of the new rules (as opposed to two years as previously proposed in the Spring Budget). These rules will enable UK resident individuals to remit income and gains previously covered by the remittance basis rules to the UK with a reduced tax charge – i.e. 12% in the 2025/26 and 2026/27 tax years, and 15% in the 2027/28 tax year.

Capital Gains Rebasing

Individuals who have claimed the remittance basis in any of the tax years from 2017/18 to 2024/25 and who were not UK domiciled before April 2025, will have the option to rebase any foreign assets that they held on April 5 2017, thereby reducing the gain realised on a future disposal. Those assets would then have a book cost of the April 5 2017 value.

Changes to Inheritance Tax

As part of the announcement on the changes to the non-UK domicile regime, a residence-based system is to be introduced for Inheritance Tax (IHT), replacing the current domicile-based system.

As is currently the case, UK assets will always be subject to IHT. The key change is that individuals will be subject to UK IHT on their worldwide assets when they have been resident in the UK for ten out of the last twenty tax years. Such individuals are referred to as long-term residents.

It was previously suggested that IHT would continue to apply an individual’s worldwide assets for at least ten years once they left the UK, but that has been relaxed. There will be a minimum period of three years in which IHT will continue to apply and a maximum of ten. The number of years that IHT will continue to apply beyond that three-year minimum will depend on how long the individual was resident in the UK before leaving.

For trusts, whether non-UK assets are within the scope of IHT will broadly depend on whether the settlor is a long-term resident or not. Therefore, trust assets could move in and out of the scope of IHT in the same way as assets owned personally. There are, however, some important transitional provisions – for example, if the settlor has died before the new rules are in force, the IHT treatment of the trust will be determined by current rules.