The United Kingdom’s tax framework for non-domiciled (“non-dom”) residents has undergone significant reforms, impacting how foreign income and gains are taxed. These changes, effective from April 6, 2025, transition from the longstanding remittance basis to a new Foreign Income and Gains (FIG) regime. This article provides a comprehensive overview of the current system, the forthcoming changes, and their implications for non-dom taxpayers.
Understanding Non-Dom Status and the Remittance Basis
Historically, non-dom individuals—those residing in the UK without a permanent domicile—could opt for the remittance basis of taxation. This system allowed them to be taxed only on foreign income and gains brought (“remitted”) into the UK, while unremitted foreign income remained outside the UK tax scope. However, this benefit came with conditions:
• Loss of Allowances: Claiming the remittance basis typically resulted in the forfeiture of personal allowances for Income Tax and exemptions for Capital Gains Tax.
• Annual Charges: Long-term UK residents faced charges of £30,000 after seven years and £60,000 after twelve years of residence.
These provisions made the remittance basis advantageous for non-doms with substantial foreign income, allowing them to minimize UK tax liabilities.
Transition to the Foreign Income and Gains (FIG) Regime
In the Autumn Budget of October 30, 2024, Chancellor Rachel Reeves announced the abolition of the remittance basis, introducing the FIG regime effective from April 6, 2025. Key features of the FIG regime include:
• Eligibility: Individuals becoming UK tax residents after at least ten consecutive tax years of non-UK residence qualify.
• Four-Year Exemption: Eligible individuals are exempt from UK tax on foreign income and gains for the first four tax years of UK residence, regardless of remittance status.
• Post-Exemption Taxation: After the four-year period, all worldwide income and gains become subject to UK tax on an arising basis.
• Optional Claim: The FIG regime is optional; claims must be made annually. Opting in results in the loss of personal allowances and capital gains tax exemptions for the relevant tax year.
This shift aims to simplify the tax system and align the UK with international standards, moving from domicile-based to residence-based taxation.
Implications for Non-Dom Taxpayers
The transition to the FIG regime carries significant implications:
• Strategic Planning: Non-doms must reassess financial strategies, considering the four-year exemption and subsequent full taxation of worldwide income.
• Trust Structures: From April 6, 2025, protections for income and gains within settlor-interested trusts will be removed for those not eligible for the FIG regime, leading to potential tax liabilities on foreign income and gains arising in such trusts.
• Inheritance Tax (IHT): A proposed shift to a residence-based IHT regime is set for consultation, potentially subjecting non-doms to UK IHT on worldwide assets after ten years of residence.
Transitional Provisions
To facilitate the transition, the government has introduced measures:
• Temporary Repatriation Facility (TRF): Available for 2025-26 and 2026-27, this allows former remittance basis users to remit pre-April 6, 2025, foreign income and gains at a reduced tax rate of 12%.
• Capital Gains Tax Rebasing: Individuals who have claimed the remittance basis can elect to rebase assets held as of April 5, 2019, to their market value on that date, potentially reducing taxable gains upon disposal.
Market Reactions and Discussions
The reforms have sparked extensive discussions:
• Potential Expatriation: Concerns arise that the abolition of the non-dom regime may prompt wealthy individuals to relocate to more tax-favorable jurisdictions, potentially impacting the UK’s economy.
• Property Market Impact: The super-prime London property market is experiencing price adjustments, partly attributed to the removal of tax perks for non-doms, leading to a more buyer-friendly environment.
• Revenue Projections: The Office for Budget Responsibility estimates the reforms could generate an additional £4.2 billion annually starting in 2026, though actual outcomes remain uncertain due to potential taxpayer migration.
The UK’s shift from the remittance basis to the FIG regime represents a substantial change in taxing non-domiciled residents. Non-doms must proactively assess their financial situations and seek professional advice to navigate this evolving landscape effectively. Staying informed and strategically planning will be crucial to adapting to these changes and optimizing tax positions under the new regime.
