Domicile now and then
From 6 April 2025, the current rules for the taxation of non-UK domiciled individuals will end.
The concept of domicile as a relevant connecting factor in the UK tax system will be replaced by a system based on tax residence.
The government will:
- implement a 4-year foreign income and gains (FIG) regime
- replace the domicile-based system for Inheritance Tax (IHT) with a residence-based system
- introduce a new Temporary Repatriation Facility (TRF). This will allow individuals previously taxed on the remittance basis to designate amounts derived from pre-6 April 2025 FIG, and pay a reduced tax rate for a period of three tax years, starting from 2025 to 2026. This facility will be extended to distributions from qualifying overseas trust structures.
- Reform Overseas Workday Relief by removing the need to keep the income offshore, extend the period that employees can benefit from the relief from three to four years and introduce an annual financial limit on the amount claimed.
Summary of changes
Under the current rules, UK resident non-domiciles who haven’t become deemed-domiciled can choose to be taxed on the remittance basis.
This means that whilst they pay tax on their UK income and gains in the same way as other UK residents, they only pay tax on their FIG when these are remitted to the UK.
This preferential tax treatment based on domicile status will be removed for all new FIG that arises from 6 April 2025.
FIG Regime
It will be replaced by an internationally competitive residence based regime, providing 100% relief on eligible FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in the 10 tax years immediately prior to their arrival (4-year FIG regime).
From 6 April 2025, all former remittance basis users who are not eligible for the 4-year FIG regime will pay tax at the same rate as other UK resident individuals on any newly arising FIG like any other taxpayer.
Former remittance basis users will continue to pay tax on FIG that arose before 6 April 2025 that they remit to the UK.
The protection from tax on FIG arising within settlor-interested trust structures will also no longer be available for non-domiciled and deemed domiciled settlors who do not qualify for the 4-year FIG regime from 6 April 2025.
FIG that arose in protected non-resident trusts before this date will not be taxed unless distributions or benefits are paid or deemed to be paid to UK residents who do not or are unable to make a claim for the 4-year FIG regime.
FIG which arose within the trust structure before this date will be taxed on UK resident settlors or beneficiaries not within the 4-year FIG regime if these are matched to worldwide trust distributions received.
Overseas Workday Relief (OWR) will be retained and will still be based on income which relates to overseas duties determined on a just and reasonable basis.
From 6 April 2025, eligibility for OWR will be primarily based on whether employees are eligible for the 4-year FIG regime. This will provide relief from income tax for a 4-year period, regardless of whether these earnings are brought to the UK or whether they are paid into an overseas account.
For Capital Gains Tax (CGT) purposes, current and past remittance basis users can rebase their personally held foreign assets to 5 April 2017 on a disposal where certain conditions are met.
A new Temporary Repatriation Facility (TRF) will be available for individuals who have been taxed on the remittance basis. Individuals who have previously claimed the remittance basis and have untaxed FIG will be able to make an election to designate amounts derived from previously untaxed and unremitted FIG that arose prior to 6 April 2025 for a period of 3 tax years, from 6 April 2025.
Designated amounts will be charged to tax at a rate of 12% in tax years 2025 to 2026 and 2026 to 2027, with the rate rising to 15% in tax year 2027 to 2028. Any remitted ‘designated amounts’ will not otherwise by charged to UK tax.
The TRF will be available provided the individual is UK resident in the relevant tax years.
The TRF will also be available for qualifying UK resident settlors or individuals who receive a benefit from an offshore trust structure during the 3 tax years, from 6 April 2025.
To qualify the relevant individual must be a former remittance basis user, the benefit must be received 4 during the TRF period and must be capable of being matched to FIG that arose within the settlement before 6 April 2025.
Individuals who make a designation under the TRF and have paid the TRF tax charge will have the freedom to choose in which year to remit the designated amounts to the UK. This does not need to be in the TRF window and could be in a later tax year.
IHT is currently a domicile-based system. A new residence-based system for IHT will be introduced from 6 April 2025. This will affect the scope of property brought into UK IHT for individuals and settlements.
The test for whether non-UK assets are in scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. The time the individual remains in scope after leaving the UK will be shortened where they have only been resident in the UK for between 10 and 19 years.
Subject to transitional points, the excluded property status of non-UK settled assets will not be fixed at the time the assets are added to a settlement. Instead, they will only be excluded property (and so not subject to IHT charges) at times when the settlor is not long-term resident. When a settlor is long-term resident, any assets they have settled (even when not long-term resident) will be subject to IHT.
The following article remains valid until 6 April 2025.
- This article explains the concept of UK domicile and the number of different ways UK domicile can be acquired.
- There are a number of different ways to acquire a UK domicile which will be considered below.