Navigating the UK’s Updated Tax Rules for Non-Domiciled Individuals – Personal Income Tax

The UK has seen significant changes in its tax regime for non-domiciled individuals following the Spring Budget. Although HMRC began holding ‘listening sessions’ for advisors and stakeholders to discuss the proposals, these sessions were cut short by the announcement of a General Election on 4 July. Consequently, the reforms were not included in the pre-dissolution Finance Bill, leaving many questions about their implementation.

Despite the uncertainty, it is almost certain that some form of reform will proceed. Both the Conservative and Labour parties have proposed changes, with Labour suggesting additional measures to close perceived loopholes in the Conservative proposals.

The Non-Domiciled Regime

Non-domiciled individuals, or “non-doms,” have historically enjoyed significant tax advantages in the UK, including:

Remittance Basis of Taxation: Allows non-doms to exclude non-UK income and gains from UK taxation for up to 15 years, subject to specific conditions.
Overseas Workday Relief (OWR): Reduces UK tax on employment income for up to three years after arrival, benefitting both employees and employers.

Key Features of the Remittance Basis

– Non-doms can only exempt income and gains from UK tax if these are received and retained outside the UK.
– Complex rules require meticulous tracking of fund sources to avoid accidental taxable remittances.

Proposed Changes by the Conservative Government

The primary change proposed is the abolition of the remittance basis of taxation, to be replaced by the ‘Foreign Income and Gains’ (FIG) regime from 6 April 2025. Key points include:

New FIG Regime: Allows exclusion of foreign income and gains from UK taxation for the first four years of UK tax residence, regardless of domicile status. Individuals can elect for this annually.
Eligibility: Available only to those who have been UK non-resident for the ten tax years prior to establishing residence.
Transition: After four years, all individuals will be taxed on their worldwide income and gains.

Transitional Provisions

Temporary Repatriation Facility: A two-year window to bring previously excluded FIGs to the UK at a 12% tax rate.
50% Reduction: A one-off 50% reduction in the amount of foreign income taxable in 2025/26.
Asset Valuation: Some ex-remittance basis users can use the 5 April 2019 value of assets disposed.

Labour Party’s Response

Labour supports reform but argues that the Conservative proposals leave loopholes for tax avoidance. Their additional proposals include:

Inheritance Tax: Including all foreign assets held in trusts within the scope of inheritance tax.
Removing Discounts: Eliminating the 50% discount in 2025/26.
Investment Incentives: Suggesting that UK investment income might be received tax-free during the four-year FIG window.

Overseas Workday Relief (OWR)

OWR will be retained and simplified:

Eligibility: Employees can benefit from OWR on work duties outside the UK for the first three years of UK tax residence.
No Condition on Remittance: Relief no longer depends on keeping income/gains outside the UK.

Transitional Rules

– Some transitional rules will apply to those who have not yet received their full period of OWR under the old rules.
– The required period of non-residence before applying for OWR increases from four years to ten.

What Next?

The proposed changes to the taxation of non-domiciled individuals are likely to proceed in some form, even with a potential change in government. Key considerations include:

Readiness: Ensuring HMRC, taxpayers, and employers are ready for the 6 April 2025 target date.
Consultation: The level of consultation that will be possible before implementation.

Conclusion

While the simplification arising from the abolition of the remittance basis of taxation is welcomed, individuals and employers will need support to manage these changes and navigate the transitional periods. Keeping informed and seeking professional advice will be essential for adapting to the new tax landscape effectively. Contact our team for more information.