Changes to the Non Domicile rules
For tax purposes, the question of domicile is a longstanding concept and primarily relates to whether individuals who reside in the UK for periods of time but do not see it as their permanent home should have favourable treatment for UK tax purposes. An individual is domiciled in the UK if they ‘belong’ in the UK and it is their home. This is usually established through their parents’ (usually father’s) domicile at the date of the individual’s birth, known as ‘domicile of origin’; or by making the UK their permanent home and renouncing their native land ( a domicile of choice).
Currently being a non UK domiciliary has two main advantages:
- Whilst UK source income is subject to UK tax, overseas source income and gains – foreign income gains (FIGs) are only taxable if bought to the UK : the remittance basis
- A non UK domiciliary is only subject to UK IHT on UK situ assets
Over the past few years both the income tax and IHT rules have gone through many changes. Since 2017, subject to how many years an individual has been UK tax resident they may have to pay an annual amount to HMRC to use the remittance basis, and after a certain amount of years of UK tax residence, for both income tax and IHT they become UK “deemed domiciled” and no longer have the full tax benefits. This has of course been a political hot potato for some months now.
The new rules from April 2025 are proposed to operate for income tax purposes such that if a non UK domiciled individuals comes to live in the UK after a period of 10 years consecutive non-residence, there will be full tax relief for a 4-year period of subsequent UK tax residence on FIGs arising during this 4-year period, during which time this money will remain outside the UK tax net and can be brought to the UK without an additional tax charge. After this period worldwide income and gains of a UK tax resident will be taxable in the UK regardless of domicile.
Existing tax residents, who have been tax resident for fewer than 4 tax years and are eligible for the scheme, will also benefit from the relief until the end of their 4th year of tax residence.
Whilst this will undoubtably increase the UK tax revenue, the remittance basis was incredibly complex, with the need to separate overseas capital and income in order to work out which funds could come to the UK without generating a tax liability, and it appears that these tracing rules will no longer apply under the new proposed rules.
Whilst there is quite a bit of detail in the HMRC published notes, there is a lot of detail and transitional rules that we will have to wait until we have the detailed legislation to fully understand.
There will be planning needed for any current non domiciled and UK resident individuals to consider before April 2025.
We have less detail on how this will apply for IHT purposes. We know that the intention is to move to a residence based system from 6 April 2025 and It is envisaged that the new rules will involve charging IHT on worldwide assets owned outright when a person has been resident in the UK for 10 years (the “residence criteria”), with a provision to keep a person in scope for 10 years after leaving the UK (the “tail” provision). The design of the system (including consideration of further criteria such as other connecting factors) will be subject to consultation.
If you have any queries relating to the changes to Non Domicile Rules, please contact us.
