Written by From 6 April 2025, the taxation of non-UK domiciled individuals and the “domicile-based system” which has formed part of the UK’s tax system for over 200 years, will change to a “residence-based” regime.
For many years a person’s tax status was determined by their domicile of choice. Individuals were only required to pay UK tax on income earned within the UK and were not obligated to pay tax to HMRC on income generated in other countries, unless those funds were remitted to a UK bank account. Wealthy individuals and estate planners were therefore able to apply the rules to maximise savings.
Historically, “non-dom” status has garnered significant attention due to being frequently cited in newspapers, particularly in relation to High-Net worth individuals (HNIs), who were often perceived as evading the taxman by relocating to countries or jurisdictions with lower-tax regimes. According to HMRC, 74,000 people claimed non-dom status in 2022-23.
New 4-Year FIG Regime
For those considering relocating to the UK, from 6 April 2025, qualifying new residents in the UK will benefit from a 100% tax relief on eligible foreign income and gains during their first four years of UK tax residence. The new regime is designed to attract globally mobile individuals to the UK by offering a tax-efficient environment for their overseas earnings.
Key Points:
- The relief applies only to individuals who have not been UK tax residents in the 10 tax years immediately before their arrival.
- To qualify as a new resident in the UK for tax purposes, you generally need to spend 183 days or more in the UK during a tax year or meet specific conditions outlined in the Statutory Residence Test (SRT).
Temporary Repatriation Facility (TRF)
For those with investment portfolios or foreign bank accounts, a new TRF will allow individuals who have previously been taxed on the remittance basis to bring pre-6 April 2025 foreign income and gains into the UK at reduced tax rates. This is a significant area that may suit HNI considering moving assets to the UK.
Key Points:
- The TRF will be available for three tax years, starting from 2025–2026.
- Tax rates will be 12% for the first two years and 15% for the third year.
- Individuals must be UK residents in the relevant tax years to access this facility.
Inheritance Tax (IHT) Reforms
For individuals who hold assets across different countries (e.g. a holiday home in Europe) you need to review your exposure to the new UK inheritance tax regime. The domicile-based system for Inheritance Tax will be replaced with a residence-based system. This change will affect the scope of property brought into UK estate calculations for individuals and settlements.
Key Points:
- Non-UK assets will be subject to IHT if the individual has been a UK resident for at least 10 out of the last 20 tax years preceding the chargeable event (including death).
- NB. You may also be considered a ‘resident’ under the automatic UK tests if you spent 183 or more days in the UK in the tax year. There are additional criteria you need to be aware of such as whether your only home was in the UK for 91 days or more in a row, whether you worked full time in the UK at any point in the tax year or have proven ties to the UK such as work or family.
Conclusion
The new residence-based tax regime represents a significant shift in how non-UK domiciled individuals will be taxed in the UK, and is particularly important when considering estate planning arrangements such as making a Will or reviewing inheritance tax liability.
If you have any queries about the implications of the new residence-based tax regime, please do not hesitate to contact our Private Client department today.
HMRC are due to publish detailed guidance on all these changes at the end of April 2025 and it is prudent for individuals and estate planners to start preparing for the transition to the new regime.
Whether your query relates to transferring assets to the UK or making estate planning arrangements, Ian Bowyer (Partner) specialises in dealing with complex inheritance tax arrangements and cross-jurisdictional matters. Our firm also has close relationships with financial advisors able to assist where necessary.