Spring Budget 2024: Simplifying the UK’s Tax Reforms for Non-Domiciled Residents
The UK government is committed to creating a tax system that not only draws in global talent and investment but also spurs economic expansion. At the heart of its philosophy lies the conviction that individuals with more substantial financial means ought to bear a larger share of the tax burden.
Outdated Domicile Concept and Tax Modernisation
The domicile concept, deemed outdated, has previously allowed individuals to maintain offshore incomes and gains, thereby reducing their tax liability in the UK. In an effort to modernise the tax system, changes are being introduced to phase out the current rules for non-UK domiciled individuals (commonly known as ‘non-doms’) starting from April 2025.
Related: WHY ARE RESIDENCE AND DOMICILE IMPORTANT?
The New Residence-Based Tax Regime
April 2025 will mark the introduction of a residence-based tax regime, which builds on the 2017 reforms that eliminated the option for permanent non-dom status. The government’s objective is to maintain international competitiveness and continue drawing top international talent to the UK.
Under the new system, newcomers to the UK will enjoy full tax relief on foreign income and gains for the first four years of tax residency. This includes transitional provisions for existing non-doms. The rationale is straightforward — those who significantly benefit from UK public services by establishing their life in the UK should contribute accordingly by paying the same taxes as all other residents. After a period of four years of tax residency in the UK, individuals will be required to pay UK tax on any foreign income and gains, and therefore aligning them with the duties of other UK residents.
These reforms anticipate an increase in revenue, projecting an annual £2.7 billion by the fiscal year 2028-29, adding to the existing £8.5 billion contributed by non-doms.
Understanding ‘Non-Dom’ Status and Upcoming Changes
Non-doms, defined as individuals with a domicile outside the UK, currently enjoy a tax advantage by opting for the remittance basis of taxation. This means they are taxed on their UK income and gains as per usual but taxed on their foreign income or gains only when it is remitted to the UK.
Learn more about the importance of domicile for IHT purposes here:
DOMICILE AND IHT PLANNING
From April 2025, the government will discontinue this remittance basis of taxation for non-doms, in favour of a simpler and fairer regime. Instead, new arrivals with ten consecutive years of non-residence will experience full tax relief on foreign income and gains during their initial four-year period of UK residency, even if this income is brought into the UK.
For existing tax residents who have resided in the UK for fewer than four years, similar relief applies until they reach their fourth residency year. The new policy makes it more appealing for these individuals to spend or invest foreign income and gains within the UK without facing additional tax charges.
Additionally, the government plans to retain and simplify the Overseas Workday Relief (OWR), which currently benefits non-doms in their first three years of UK tax residency.
Inheritance Tax Considerations and Consultations
With respect to inheritance tax (IHT), current regulations exempt non-doms from paying IHT on non-UK assets unless they have been tax residents for 15 out of the last 20 years. Plans to transition IHT to a residence-based system are underway, with the government keen to consult on the best approach. To maintain certainty for taxpayers, non-UK assets settled into a trust by a non-domiciled settlor before April 2025 will retain their existing treatment and remain outside the scope of UK IHT.
Read More: HMRC WINS IHT CASE OVER LOCATION OF DOMICILE OF CHOICE
Transition to the New System
Recognising the significant impact on current non-doms, the government is introducing tailored transitional arrangements. This includes a temporary 50% reduction in personal foreign income subject to UK tax for the tax year 2025-26 for those losing access to the remittance basis and not eligible for the new four-year relief.
To assist in the transition, there is also a provision for rebasing capital assets to April 5, 2019, levels for disposals taking place post-April 6, 2025, for current non-doms.
These steps outline a redesigned tax landscape, placing simplicity and fairness at the core of its mission for both current and prospective UK residents.
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We’re here to guide you through these changes with expertise and empathy, ensuring that you’re not only compliant but also optimising your position.
For official statement, see here: https://www.gov.uk/government/publications/spring-budget-2024-non-uk-domiciled-individuals-policy-summary/spring-budget-2024-non-uk-domiciled-individuals-policy-summary
