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The UK's tax regime for non-domiciled residents (non-doms) is set for significant changes starting 6 April 2025.

This reform will phase out the longstanding remittance basis tax system, impacting UK residents whose permanent home is overseas. Historically, the remittance basis allowed non-doms to avoid UK taxes on their foreign income and gains (FIG), unless those earnings were brought into the UK. Additionally, it provided inheritance tax protections on non-UK assets.

From 2025, the UK will introduce a new four-year FIG regime, replacing the remittance basis. This regime will only apply to individuals who have not been UK residents for at least the past ten tax years. Eligible individuals can benefit from this regime for up to four years, during which their foreign income won't be taxed in the UK, even if remitted. However, they will lose certain tax allowances, such as personal allowances and the annual exemption for capital gains tax (CGT).

For current non-doms, transitional provisions will be in place. In the 2025/26 tax year, they will be taxed on only 50% of their foreign income if they move from the remittance to the arising basis and do not qualify for the four-year regime. From 2026/27, their foreign income will be taxed normally. Additionally, a reduced 12% tax rate will apply to remittances of pre-2025 personal FIG for 2025/26 and 2026/27.

The impact on non-resident trusts will also be considerable. From 2025, the protection from UK taxation on income and gains within these trusts will end for those not qualifying for the new FIG regime, with FIG taxed on the UK resident settlor or transferor on an arising basis.

The overhaul will affect inheritance tax rules, moving towards a residence-based system from 6 April 2025, with a consultation period expected. The goal is to keep individuals who have been UK residents for ten years within the scope of UK inheritance tax for ten years after they leave the UK.

For employers and internationally mobile employees (IMEs), the new rules allow for year-by-year election into the FIG regime, affecting their personal tax allowances and the operation of PAYE. Despite losing some tax benefits, the reduced tax rate during the transitional period may be attractive for remitting untaxed earnings, potentially decreasing the employer tax burden, especially for US-taxable IMEs due to foreign tax credit implications.

These upcoming changes signal a move towards simplifying the tax system for non-doms, albeit introducing new complexities and considerations for those affected. Individuals and employers should prepare for these changes by consulting with tax professionals to understand the full implications and strategise accordingly.

For personalised advice and more detailed information, expatriates can contact us.