Abolishing non-dom status – what happens now?
Abolishing non-dom status – what happens now?
The current tax treatment for UK resident non-domiciled individuals (non-doms) will be abolished from 6 April 2025. The 2024 Autumn Budget provided more details on how it will work in practice - find our full analysis of the abolition of the non-doms regime on our Budget hub.
What is non-dom status?
The non-dom regime has formed part of the UK’s tax system for over 200 years. Where the conditions are met, it has enabled UK resident individuals whose permanent home is outside the UK to benefit from the ‘remittance basis’, effectively exempting their foreign income and gains (FIG) from UK taxation unless remitted to the UK. It has also offered protection from Inheritance Tax on their non-UK sited assets. The rules have been adjusted and modified on numerous occasions, with the last big changes occurring in 2017, when a 15 year ‘cap’ was introduced, limiting the number of years a non-dom could benefit under the rules.
New Foreign Income and Gains rules
From 6 April 2025, the current remittance basis regime will be replaced with a residence-based test. The new regime will be available for up to four years starting from 6 April 2025, or the first tax year in which the individual becomes UK resident if later. During these four years, new arrivals to the UK will not be subject to tax on their FIG, nor on distributions from non-resident trusts. These can be brought into the UK freely without attracting a tax charge. Those opting into the four-year FIG regime will lose their entitlement to personal allowances and annual exempt amounts for CGT.
This new regime will only be available to any individuals who have been non-UK resident for at least the previous ten tax years, but qualifying individuals who have been tax resident in the UK for less than four tax years by 6 April 2025 will be able to use the FIG regime for any remainder of the four-year term. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents.
Transitional provisions for current non-doms
For those who currently hold non-dom status who will move from the remittance basis to the arising basis on 6 April 2025, as they do not qualify for the four-year FIG regime, some transitional relief will be available (although, less generous than was announced by the previous Conservative government). The new Labour government will not, for example, be introducing the 50% reduction on foreign taxable income for individuals losing access to the remittance basis on 6 April 2025.
There will be a rebasing of foreign capital assets for certain individuals with the rebasing date expected to be announced at the Autumn Budget (30 October 2024). Business Investment Relief will continue to be available.
A Temporary Repatriation Facility (TRF) for FIG that arose to former remittance basis users before 6 April 2025 will be introduced, albeit the rate of tax and the length of time are not confirmed. The Government say that they wish to make the TRF as attractive as possible and details on whether it may also extend to stockpiled income and gains in offshore structures will also be confirmed at the Budget.
Impact on non-resident Trusts/offshore structures
From 6 April 2025, the protection from taxation on income and gains within settlor-interested trust structures will be removed for those who do not qualify for the four-year FIG regime. Instead, FIG arising in such settlements will be taxed on the UK resident settlor/transferor on an arising basis. FIG arising pre-6 April 2025 will continue to be matched on a worldwide distribution basis.
There will be a review of the Transfer of Assets Abroad (ToAA) provisions. It remains to be seen what the ToAA review might mean in practice, and we await further details, with no changes expected to take effect before 6 April 2026.
Overseas Workday Relief
A form of overseas workday relief (OWR) will be retained. It is likely that employees arriving in the UK from 6 April 2025 who haven’t been resident outside the UK for at least 10 UK tax years will no longer be eligible for overseas workday relief, but further details are expected to be confirmed at the upcoming Budget. Currently, OWR is only restricted to non-doms who have been non-resident in the three UK tax years prior to arriving in the UK. The Government will engage with stakeholders and further details are expected to be published at the Autumn Budget.
What does the FIG regime mean for employees?
It appears that the FIG regime will apply to employees who were born in the UK but have been absent from the UK for 10 tax years or more.
What does the FIG regime mean for employers?
We will need to wait until the Budget for confirmation of the new OWR rules but we envisage no significant adverse impact to employers. We expect HMRC to allow applications for section 690 directions, or a new equivalent, so employers can operate PAYE on a reduced percentage of earnings for employees eligible for OWR.
Assuming OWR will still be available for three years, we expect no increased UK tax burden for employers of tax equalised or partially tax protected employees. The employer tax burden may in fact decrease due to the removal of the restriction on bringing foreign earnings to the UK.
Non-dom inheritance tax
There will be no formal consultation on the proposals to bring in a residence-based test for inheritance tax (IHT). Instead, the Government will review stakeholder feedback and carry out further engagement over the summer.
The new rules will apply to IHT on chargeable events occurring on or after 6 April 2025 and the test for whether overseas assets are within the scope of IHT will be whether a person has been UK resident for 10 tax years prior to the year of the chargeable event. Once you meet this 10 year test, you stay within the UK IHT net for the next 10 years whether resident in the UK or not. Consequently, individuals would need to be non-UK tax resident for at least 10 years after leaving the UK to be outside of IHT.
Deaths occurring before 6 April 2025 will be subject to the current rules.
In addition, the use of Excluded Property Trusts to exempt overseas assets from IHT will end. More details on these rules, together with potential transitional arrangements is expected to be published at the Autumn Budget.
Where next for non-doms?
There is clearly a lot to think about and whilst the substance of what has been announced largely reflects what was expected, individuals can now at least plan with a greater degree of certainty. It’s probably best to start with the ’slow thinking’ tasks of looking at your long-term plans for your lifestyle and what you want to achieve for your family and business. Ideally this should range from where you want to be to the assets you want to keep and what you plan to build or sell/pass on. Once you have settled your goals and objectives then it will become clear where some preparatory tasks can be undertaken.
While there is much still to be established, we recommend that all current non-doms, regardless of how long they have lived in the UK, should consider their position without delay. Get in touch with an expert BDO adviser to discuss your own or your client’s options.