UK’s non-dom tax regime to be abolished from April 2025

The current beneficial tax regime will be replaced with a new residence-based regime under which individuals coming to the UK can elect not to pay UK tax on foreign income and gains (FIGs) in their first four years of UK tax residence. Individuals who have been UK tax resident in any of the 10 consecutive years prior to their latest arrival will not be eligible for relief.

According to a policy paper published by the Treasury yesterday, the changes will “address unfairness in the tax system and ensure that everyone who is long-term resident in the UK pays their taxes here”.

The new system will implement many of the reforms to the taxation of non-doms announced by the previous government at the Spring Budget. However, the previously announced 50% reduction in taxable foreign income for individuals who lose access to the current beneficial remittance basis of taxation in the first year of the new regime will not be introduced. The government will also review some other key areas of the previously announced reforms to ensure the new regime is as fair and competitive as possible.

Steven Porter, a tax expert at Pinsent Masons, said: “Although largely expected following the government’s comments on the non-dom regime during the election campaign, the proposed new system will still come as a disappointment to many non-doms who are currently UK tax resident and claiming the remittance basis. In particular, the removal of the 50% reduction in taxable foreign income for individuals who lose access to the remittance basis in the first year of the new regime will be a recognisable loss for those who were hoping to consider their options and take some time to arrange their tax affairs.”

A temporary repatriation facility will be made available for individuals who have previously claimed the remittance basis, to allow them to remit foreign income and gains that arose prior to 6 April 2025 and pay a reduced tax rate on the remittance for a limited time period. The rate and length of time such a facility will apply for has not yet been confirmed.

Porter said: “Given the limited time before the introduction of the new regime, a reasonable transitional facility should be announced as soon as possible to reduce the considerable uncertainty that currently exists for non-domiciled individuals with significant foreign income and gains.”

The current inheritance tax (IHT) system will also be reformed and replaced with a new residence-based system from 6 April 2025.  The reforms will affect the scope of property brought into UK IHT for individuals and trusts. Under the latest proposals, non-UK assets will be within the scope for UK IHT if a person has been resident in the UK for 10 years prior to their death, or when an IHT charge arises. A person’s non-UK assets will remain within the scope of UK IHT for 10 years after leaving the UK. IHT charges on deaths before 6 April 2025 will continue to be taxed under the current rules. The use of trusts known as excluded property trusts to keep assets out of the scope of IHT will also be abolished.

According to the Treasury paper, everyone who is in the scope of UK IHT should pay UK IHT, regardless of where their assets are held. However, the government acknowledges that trusts will already have been established and structured to reflect the current rules. The government is considering how the changes to IHT can be introduced in a manner that allows existing trust arrangements to be adjusted, while ensuring the same tax treatment for all long-term UK residents. Further details are expected to be published at the UK’s Budget, which is scheduled to take place on 30 October.

Currently, liability to IHT depends on domicile status and the location of the assets. Under the current regime, no IHT is payable on non-UK assets of non-domiciled taxpayers until they have been UK resident for 15 out of the past 20 tax years.

Various anti-avoidance rules will also be reviewed, including the “Transfer of Assets Abroad and Settlements legislation” to ensure that they “remain fit for purpose”, whilst being simple to apply. Changes are not expected to be introduced before April 2026.

The government is not intending to undertake a formal consultation on the new rules. Rather it will review feedback already provided to the Treasury and engage further with stakeholders over the summer.

Porter said: “Given that the government is unwilling to hold a formal consultation on the new regime, the possibility of further significant changes seems unlikely. However, the details of the new system remain sparce and there are still many unknowns. It will be interesting to see the impact of these announcements on existing non-domiciled individuals and whether the removal of tax relief affects whether they choose to leave the UK.”