Being a non-UK domicile has for a number of years enabled certain individuals (some of which are high profile, think of the current Prime Minister’s spouse) to have significant tax benefits (although from 2008 the benefits have been restricted).
Non-domicile (non-dom), is a British tax status that dates back to colonial times making it over 200 years old. The current domicile rules have been part of the UK tax system since 1914. Non-doms are individuals who are resident in the UK, but who claim that their domicile, being the centre of their personal and financial interests, is outside of the UK. Domicile is not defined by statute and is a concept of common law. Every individual has a domicile. Unlike residence, it is not possible to be domiciled in two countries or to not have a domicile. There are two main ways that domicile is determined:
- Domicile of origin – this is either the country that you were born in or, if your father came from a different country, your father’s domicile.
- Domicile of choice - if you are over 16 and choose to leave your domicile of origin and live indefinitely in another country, you can acquire a new domicile of choice in that new country. This overrides your domicile of origin.
If an individual is a UK tax resident but has non-dom status, they can choose to be taxed on either the arising or remittance basis. The arising basis means the individual is taxed on their worldwide income and gains in which it arises or is received. It makes no difference whether such income is brought back to the UK or kept overseas, i.e. taxable on worldwide income and gains, as if UK tax resident and UK domiciled.
The remittance basis means that non-UK sourced income or chargeable gains are only subject to UK tax, if brought back (i.e. remitted) to the UK or is enjoyed in the UK.
In summary, currently a non-dom can decide how they are taxed, although after being UK tax resident for seven years, there is a charge for this privilege, £30k, increasing to £60k after 12 years. After 15 years, the individual becomes deemed UK domiciled and is taxed on the worldwide basis as a UK tax resident and UK domiciled individual, however, there is tax planning that can be implemented in advance to shelter assets from UK tax using trusts, and other structures.
The concept of domicile and taxation is only relevant in the UK, no other country recognises the status. HMRC published its latest annual statistics on non-domiciled taxpayers on 6 July 2023, reporting that only 55,200 UK residents claimed to be non-UK domiciled in 2022. Only 37,000 of UK resident non-doms claimed to be taxed under the remittance basis in 2021, and just 2,100 paid the remittance basis charge (£30k, or £60k). So, the changes announced in the Spring Budget are not going to impact a significant number of individuals, but they tend to be the wealthiest in our society.
From 6 April 2025, the current remittance basis of taxation will be abolished and replaced by a simpler residence-based regime.
Under this new regime, new arrivals to the UK, who have a period of ten consecutive years of non-UK tax residency, will not pay tax on foreign income and gains arising in the first four years of UK residence and will be able to bring these funds into the UK without any additional tax charges.
Existing non-UK domiciled, UK tax residents, who have been UK tax resident for fewer than four tax years are also eligible for the scheme and will benefit from the relief until the end of their fourth year of residence.
The UK statutory residence test will be used to determine tax residence for a tax year. Treaty residence (tax residency status determined by a double tax treaty) or non-residence status and any split years will be ignored. A claim must be made for each year in which an individual wants the new regime to apply. Should an individual leave the UK temporarily during the four-year period, they will be able to make a claim for the new regime to apply for any qualifying tax years remaining on their return to the UK.
Transitional rules
Transitional arrangements will apply to non-UK domiciled individuals who will be affected by the announced changes.
These include:
- A temporary 50% reduction in foreign income subject to tax in 2025–26 for non-UK domiciled individuals who will lose access to the remittance basis on 6 April 2025 but are not eligible for the new regime. This one-year reduction only applies to foreign income, it will not apply to chargeable gains.
- Rebasing of capital assets to 5 April 2019 for disposals after 6 April 2025 for current non-UK domiciled individuals who have claimed the remittance basis (this rebasing will be subject to conditions that have yet to be announced).
- A new Temporary Repatriation Facility for 2025–26 and 2026–27 which will allow non-UK domiciled individuals to remit foreign income and gains that arose before 6 April 2025 at a rate of 12% along with the relaxation of mixed fund ordering rules to make it easier for individuals to tax advantage of the facility.
Trust protections
The Government has also announced that from 6 April 2025, the protection from tax on foreign income and gains arising within settlor-interested trust structures will no longer be available for non-UK domiciled individuals who do not qualify for the new regime.
Any foreign income and gains arising in the trust from 6 April 2025 will therefore be taxed on the settlor on the same basis as UK domiciled settlors at present, unless the settlor is eligible for the new regime.
Also, from 6 April 2025, the matching of pre-6 April 2025 foreign income and gains will continue but UK resident, non-UK domiciled individuals will no longer be entitled to the remittance basis in respect of worldwide trust distributions.
Beneficiaries and settlors who are within the new regime will be able to receive benefits from 6 April 2025 free from any UK tax charges whether or not the benefits are received in the UK. However, such benefits are not matched to trust income and gains and will be subject to a modified onwards gift rule.
As more detail is released, we will provide more information, however for those who impacted by the changes, decisions will need to be taken re: changing investment structures and how assets are held etc.
