Key features of the new non-UK domicile regime

29 May 2024. Published by Michelle Sloane, Partner and Jasprit Singh, Associate

This article was originally published in Bloomberg.

The UK government's unexpected announcement in Spring Budget in March on the taxation of non-domicile individuals has sparked concerns and much comment. It represents a major change to the current system of taxation, which is more than 200 years old.

The concept of domicile is to be removed from the UK tax system and replaced with residence-based tests. The remittance basis of taxation is to be abolished and replaced with a four-year period for new UK residents in which their foreign income and gains will be exempt from tax.

Generally, a UK resident is now subject to UK tax on their worldwide income and gains unless the individual is non-UK domiciled and the remittance basis of taxation applies. A “remittance” is defined widely and includes where the individual brings, uses or indirectly benefits from funds or assets representing the individual's foreign income or gains in the UK.

Changes and Impact

The proposed changes offer a welcome opportunity to simplify the current regime. With the emphasis shifting to the statutory residence-based tests—generally considered to offer greater clarity and certainty—this could reduce the scope of future disputes and require less planning.

Draft legislation is yet to be published, but is expected later this year. Individuals may therefore wish to defer undertaking any major planning until the changes and their potential impact become clearer. The impact on individuals will depend on their specific circumstances. 

We consider below the key features of the new regime and their potential impact on non-UK domiciled individuals.

Four-year regime. For individuals that become tax resident in the UK after 10 years of non-UK tax residence, a new four-year foreign income and gains regime will apply. These individuals will benefit from not having to pay tax on foreign income and gains arising in the first four years after becoming a UK tax resident. They will be able to bring such funds into the UK free from any additional charges.

The disparity between the four-year period proposed and the more favourable 10-year period offered in jurisdictions such as Italy, Greece, Portugal, and Switzerland, has led some commenters, such as the Chartered Institute of Taxation, to press the government to justify this difference. The four-year time period appears to be less attractive and less effective in encouraging inward investment and generating tax revenue for the UK Exchequer.

In light of a general election later this year, it should be noted that the opposition Labour Party also supports the four-year period.

Trust structures. From April 6, 2025, all current non-domiciled and deemed domiciled individuals who do not qualify for the new four-year regime will no longer benefit from protection from taxation on future income and gains that arise within trust structures. Also from April 6, foreign income and gains arising in nonresident trust structures will be taxed on the settlor or transferor (if they have been UK resident for more than four tax years) on the arising basis, i.e. paying UK tax on them in the tax year in which they arise, (in the same way that trust income and gains are taxed on UK domiciled settlors or transferors under the current regime).  There will be no retrospective taxation for income and gains arising within these structures between April 2017 and April 2025.

This category of individuals may be the hardest hit by the changes as they are set to lose certain trust protections. The protected settlements regime was introduced by the government seven years ago and no doubt many individuals relied on that regime when planning their affairs.

Transitional reliefs. From April 6, 2025, individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittance of pre-April 6, 2025 foreign income and gains under a new temporary repatriation facility, that will be available for tax years 2025–26 and 2026–27. The temporary repatriation facility will not apply to pre-April 6, 2025 foreign income and gains generated within trusts and trust structures.

Individuals who move from the remittance basis to the arising basis on April 6, 2025 and who are not eligible for the new four-year regime, for the 2025–26 tax year only will pay tax on 50% of their foreign income. This does not apply to foreign chargeable gains. For tax year 2026–27 onward tax will be due on all worldwide income in the normal way. 

The 12% rate is attractive as it represents a substantial saving compared to the rates that would otherwise apply to the remittance of foreign income (up to 45%) and foreign chargeable gains (up to 28%).

Inheritance tax. The government also intends to move inheritance tax from a domicile-based regime to a residence-based regime from April 6, 2025, both for personally held assets and assets held in trust.

Further details are expected in due course following a public consultation.

Property settlements. Excluded property settlements created before April 6, 2025 will continue to offer indefinite inheritance tax protection for non-UK situated assets other than those connected with UK residential property. However, the inheritance tax exposure for trusts created after April 5, 2025 will depend on the residence of the settlor at the time of each potential tax charge.

Affected individuals may wish to consider establishing excluded property trusts before April 2025.

Overseas workday relief. Overseas workday relief, which currently applies to remittance basis users in the first three tax years of UK residence, will continue to apply although in a simplified form based on an employee's residence and whether they opt to use the new four-year regime.

There appears to be a missed opportunity to align the three-year period for overseas workday relief with the four-year period of the new regime. 

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