New Tax Rules for Non-UK Residents in the UK (Effective April 2025, Possibly)
Significant changes are coming for individuals who aren't permanent UK residents (non-doms) and their financial arrangements, starting 6th April 2025. This update explains the new system and potential responses.
Key Points:
New System: The current tax system for non-doms (remittance basis) will be replaced in April 2025.
Temporary Relief: Non-doms can claim a special tax status during their first four years of UK residency. This exempts them from UK taxes on foreign income and allows them to freely bring funds into the UK.
Eligibility: Individuals must not have been UK tax residents for the 10 years before claiming this status.
Transitional Measures:
Individuals losing remittance access in 2025 will only pay tax on 50% of their foreign income for that year.
Past remittance users can calculate capital gains tax based on asset value in April 2019 (if applicable).
A "Temporary Repatriation Facility" allows past remittance users to bring in pre-April 2025 foreign income/gains at a flat 12% tax rate in 2025/26 or 2026/27.
Trusts: The current trust framework for non-doms will likely no longer apply, potentially leading to tax implications.
Inheritance Tax: Potential changes are under consideration to base inheritance tax on residency instead of domicile.
What to Do Now (for Existing Non-doms):
Review estate plans and trusts: Analyse how the new rules might affect your existing structures.
Consider bringing in foreign income/gains: For those who’ve claimed remittance basis, it might be beneficial to advance additional foreign income and gains before 6th April 2025 to take advantages of the temporary 12% tax rate in 2025/26.
Delay planned remittances: If you have substantial foreign income/gains, waiting until after April 2025 could benefit from the flat tax rate.
Trusts: Evaluate existing trust structures and explore potential adjustments to minimise the impact of lost protections.
New Trusts: Depending on your situation, creating new trusts before April 2025 might be an option to secure favourable inheritance tax treatment.
Moving to the UK: Delaying your arrival until after April 2025 could be advantageous. You'll be incentivised to keep most of your wealth outside the UK during your first four years of residency to minimise UK taxes.
4-Year Tax Break:
Replaces the existing tax system for non-residents (remittance basis).
Offers tax exemption on foreign income and gains for the first 4 years of UK residency.
Available to those who intend to stay permanently (unlike the remittance basis).
Drawbacks:
Limited to 4 years (effectively shorter due to tax year timing).
Periods of non-residence during these years reduce the benefit.
Transitional Rules:
Reduced income tax for those losing the remittance basis in 2025 (only for 1 year).
Potential tax relief for past remittance users on asset sales.
"Temporary Repatriation Facility" allows a flat 12% tax rate on pre-April 2025 foreign income brought into the UK in 2025/26 or 2026/27.
Future Inheritance Tax Changes:
May switch from a domicile-based system to a residence-based system (details under discussion).
This could mean worldwide assets taxed after 10 years of UK residency.
Trusts:
Existing tax benefits for trusts largely disappear.
New rules tax foreign income/gains in some trusts owned by UK residents.
Action Needed (Before April 2025):
Consider establishing "excluded property trusts" to potentially avoid inheritance tax.
Other Options (for Existing Non-doms):
Wait and See: Most should consult advisors and wait for election results before taking action.
Potential Strategies: Bringing in foreign income/gains early, delaying remittances, or adjusting trust terms.
For Newcomers to the UK:
Delay arrival until April 2025 (if possible): Maximise the 4-year tax break.
Minimise UK wealth during first 4 years: Benefit from the 4-year tax break.
Establish a trust before April 2025: Potentially lock in inheritance tax benefits.
Who Benefits Under the New Rules:
Those permanently moving to the UK.
Short-term residents (up to 4 years).
Individuals with significant foreign income to bring to the UK.
Domicile Still Matters:
Not relevant for UK taxes (potentially).
Still important for inheritance and other legal matters.
Other Points:
Overseas workday tax relief for the 4-year tax break only lasts 3 years.
Business Investment Relief for existing foreign income/gains continues.
Disclaimer: A potential change in government and further consultations could lead to adjustments in the final implemented rules.
In Summary:
A new 4-year tax break exempts foreign income and gains from UK taxes for the first four years of UK residency. This applies to those intending permanent residence, unlike the current system. However, the benefit may be less than expected due to limitations and the way the tax year works.
Existing trusts lose their protected tax status. Foreign income/gains arising in these trusts could now be taxed for UK residents. In some cases, trust terms can be adjusted to potentially mitigate this impact. Establishing "excluded property trusts" before April 2025 might also offer some inheritance tax benefits.
There are transitional rules to ease the impact. One allows a reduced tax rate on foreign income for those losing access to the current system in 2025. Another offers tax relief for past remittance users on asset sales. A "Temporary Repatriation Facility" allows a flat 12% tax on pre-April 2025 foreign income brought into the UK in specific years.
Inheritance tax might also change. The government proposes shifting from a domicile-based system to a residence-based one. This could mean worldwide assets taxed after 10 years of UK residency. Consultation is ongoing, and details are not finalised.
Many non-doms should wait and see how the upcoming election and any potential rule changes impact the final legislation. Consulting with financial advisors is recommended.
Some immediate actions might be relevant depending on individual circumstances. These could include establishing specific trusts, bringing in foreign income/gains early, delaying certain financial decisions, or adjusting existing trust structures.
Newcomers to the UK might benefit from delaying their arrival until April 2025 to maximise the 4-year tax break. They should also consider minimising their UK wealth during the first four years of residency and potentially establish a trust before April 2025 for inheritance tax purposes.
While domicile might become irrelevant for UK taxes, it remains crucial for inheritance and other legal matters.
Business Investment Relief for existing foreign income/gains remains available. However, a tax relief associated with working abroad is limited to the first three years of the 4-year tax break.
Additional Resources:
Spring Budget 2024: Non-UK domiciled individuals policy summary: https://www.gov.uk/tax-foreign-income/non-domiciled-residents
Technical note: Changes to the taxation of non-UK domiciled individuals: https://www.gov.uk/tax-foreign-income/non-domiciled-residents