Changes to UK taxation for non-domiciled persons

To improve and modernize the tax system, the UK has made significant changes affecting non-domiciled persons. These changes are a key shift in how the tax system will continue to deal with non-UK domiciled individuals, or in other words, individuals who are not domiciled in the UK. They primarily concern the basic principles of income taxation and introduce a new foreign income tax regime (FIG) for certain categories of tax residents.

What tax rules were previously used?

Non-domiciled persons have historically enjoyed certain tax advantages in the UK. One of the most significant advantages was the ability to apply the territorial principle of taxation, whereby individuals were taxed only on income and profits remitted to the UK, rather than on worldwide income and profits. But, this rule will continue to apply only until April 6, 2025.

After this date, the preferential regime will be canceled and all global income and profits of individuals will be subject to taxation.

Major legislative changes

Let’s look at what will change in taxation for non-domiciled persons in England:

1. Cancellation of the tax base based on remittances

The current remittance-based tax system for non-domiciled UK resident individuals will be scrapped. It will be replaced by a new foreign income and gains (FIG) tax regime.

2. New four-year FIG regime

Individuals who become UK tax residents after 10 years of residence outside the country will be able to benefit from the new four-year FIG regime. They will not be subject to FIG tax for the first 4 tax years after becoming tax residents and will be able to move funds freely into the UK without any additional charges.

3. Overseas Working Days Allowance (OWR)

Overseas Working Days Allowance will be maintained and simplified for the first 3 tax years of residence in the UK. Eligibility for OWR will depend on the employee’s place of residence and the decision to use the new four-year FIG regime.

4. Taxation of trust structures

Tax protection for future income and gains arising under trust structures will be removed for non-domiciled individuals deemed to be domiciled who do not qualify for the new 4-year regime. Individuals switching to the new FIG regime will be taxed on their resulting income and gains by the new rules.

5. Temporary Repatriation Facility (TRF)

Individuals who were taxed based on remittances will be able to choose to pay tax at a reduced rate on remittances received before this date under the new Temporary Repatriation Facility (TRF). Thus, in the tax years 2025-26 and 2026-27, a new tax rate of 12% will be introduced on remittances, and from the tax year 2027-2028, remittances will be taxed at standard tax rates.

6. Inheritance tax

Currently, inheritance tax is based on the principle of domicile. However, the government plans to switch the system to a residence-based system.

All of these rules will apply from 6 April 2025 to non-UK residents and other non-residents who have moved to the UK.

New FIG tax regime

The new personal FIG regime is available to individuals for the first 4 tax years after they become UK tax residents if they have lived outside the UK for 10 years. During this period, individuals are exempt from paying taxes and can freely transfer their funds to the UK.

At the same time, persons who choose the new financial industrial group regime will lose the right to personal tax deductions and exemption from capital gains tax.

It is important that applications for the new regime must be made each year in which it applies. Individuals who have left the UK temporarily during the 4-year period can apply for FIG treatment upon returning to the country for any of the remaining tax years. Also, those who have been residents for less than 4 years after a 10-year period of residence abroad can benefit from the new regime in any tax year of residence before the end of the 4-year period.

The changes therefore represent a comprehensive and significant overhaul of the tax system for non-domiciled persons in the UK. Non-domesticated individuals should carefully review their tax obligations and adapt their financial planning strategies accordingly. Therefore, if you have questions or require further clarification regarding the introduction of the new four-year foreign income tax regime in the UK, we recommend that you seek tax advice.

Our lawyers are ready to provide you with professional assistance and answer all your questions related to the new regime and changes. We will provide you with all the information you need so you can make informed decisions and effectively manage your tax obligations.