Changes to the non-dom tax regime explained

In the spending audit in July 2024, new Chancellor Rachel Reeves announced a number of measures to help shore up the public finances. These included the introduction of VAT to school fees and an increase in the energy and gas company windfall tax. Another headline announcement was the abolition of the non-dom tax regime. In this post, we look at how and when the non-dom tax regime will be scrapped, and what will replace it.

What is the non-dom tax regime?

Most UK taxpayers are domiciled in the UK. If you are domiciled here, you pay UK tax on your worldwide income and gains. This is the ‘arising basis’ of taxation.

On the other hand, if you are UK tax resident, but not domiciled in the UK, you can choose something called the ‘remittance basis’ of taxation. You still pay normal taxes on your UK income and gains. However, you only pay tax on foreign income or gains if they are remitted to or enjoyed in this country.

People choosing the remittance basis of taxation usually have significant non-UK gains or income. By claiming the remittance basis, you lose your income tax personal allowance and annual exempt amount for CGT. On the flip side, you’re not subject to inheritance tax on your non-UK assets.

Non-doms opting into the remittance basis for a long period also have to pay for the privilege. Once a non-dom has been UK tax resident for more than seven out of the previous nine tax years, choosing the remittance basis stops being free. Instead it costs £30,000 per year, rising to £60,000 once they have been UK tax resident for more than 12 years.

Once a non-dom has been UK tax resident for 15 of the previous 20 tax years, they lose their entitlement to claim the remittance basis of taxation. Instead, they have to switch to the arising basis of taxation and pay tax on all worldwide gains and income.

What is the new non-dom tax regime?

Back in the Spring Budget 2024, then Chancellor Jeremy Hunt announced the abolition of the remittance basis of taxation for non-domiciled individuals. Instead, from 6th April 2025, a new Foreign Income and Gains (FIG) regime would come into force.

In her spending audit, new Chancellor Rachel Reeves said she would implement the new FIG regime. However, the Treasury has also said the new government will remove several advantages for non-doms that were left by the original FIG proposals.

How will the FIG scheme work?

The new FIG scheme comes into force on 6th April 2025.

The scheme will be open to people who become UK tax resident after 10 consecutive years of being non-resident.

Qualifying non-doms will not have to pay tax on foreign income or gains for the first four years that they are UK tax resident.

The scheme will be optional. However, anyone choosing to be taxed under the FIG scheme will lose their entitlement to personal allowances and the annual CGT exempt amount.

When FIG comes into force, people who have been UK resident for less than four years (after a period of 10 tax years of non-UK residence), will be able to use the new system for the remainder of those four years.

The previous government planned to offer a 50% reduction of foreign taxable income for the first year of the scheme to people who lost the remittance basis. The Labour government has now confirmed this will not be available.

FIG and inheritance tax

The Labour government has confirmed it plans to scrap the current domicile-based inheritance tax (IHT) system. A new residence based system will apply from 6th April 2025. From this date, non-UK assets will be in scope for IHT if a person has been UK resident for 10 years prior to the tax year the chargeable event occurs. An individual will also be subject to IHT on non-UK assets for 10 years after ceasing to be non-UK tax resident.

Another significant change will be the ending of excluded property trusts (EPTs) to keep assets out of the scope of IHT. However, it is not yet clear how government will treat existing trusts or those set up in advance of the new legislation.

I’m a non-dom. What should I do next?

If you are a non-dom, you may be considering leaving the UK. Alternatively, you may be thinking of staying abroad for longer periods so that you don’t become UK-tax resident. For many, decisions like these will hinge on a lot of factors, such as the tax regime in the country you want to move to. Alternatively, you may have strong roots in the UK and are willing to pay more tax to stay here. However, from a UK tax point of view, our accountants are very happy to advise non-doms on their options. If you’d like advice, get in touch with our friendly team today.