As expected the Government has followed through with their plans to abolish the current tax rules for non-domiciled individuals and replace them from 6 April 2025 with a new four year foreign income and gains (FIG), regime for Income Tax (IT) and Capital Gains Tax (CGT), and a residence based test for Inheritance Tax (IHT) purposes.
This article outlines the current rules and summarises the new reforms coming in this April.
Current Rules: Domicile and Residence
What is Domicile?
Domicile refers to the country an individual treats as their permanent home, which may be different from where they actually reside. Domicile falls into four main categories:
- Domicile of Origin: This is usually inherited from your father (or mother, if born outside of marriage) at birth.
- Domicile of Dependency: Applies to minors under the age of 16 whose domicile changes with that of a parent or guardian.
- Domicile of Choice: Acquired by an individual who decides to settle permanently in a new country and severs ties with their domicile of origin.
- Deemed Domicile: You are deemed domiciled in the UK if you have been resident 15 of the last 20 years. You will also be a Formerly Domiciled Resident if you were born in England and Wales, acquired a domicile of choice in another country but you have been resident in the UK for one of the last two previous tax years.
Individuals domiciled in England & Wales are liable to IHT on their worldwide assets, whereas non-domiciled individuals are liable to IHT only on assets based in England & Wales.
NB: It is worth noting that whilst the term 'UK-Domicile' is widely used, you are domiciled in England & Wales, Scotland or Northern Ireland.
How does your Domicile affect Inter-Spousal Transfers?
Domicile currently affects the transfer of assets for Inheritance Tax purposes in lifetime or on death between spouses in the following ways:-
- UK Domiciled Spouse to UK Domiciled Spouse = Unlimited spouse exemption on transfers and therefore transfers are fully exempt for IHT purposes.
- Non-UK Domiciled Spouse to UK Domiciled Spouse = Unlimited spouse exemption on transfers and therefore transfers are fully exempt for IHT purposes.
- Non-UK Domiciled to Non-UK Domiciled = Unlimited spouse exemption on transfers and therefore transfers are fully exempt for IHT purposes.
- UK Domiciled to Non-UK Domiciled = The spousal exemption for IHT purposes is limited to £325,000.
The above rules apply to Civil Partners in the same way as they do Spouses.
What is Residence?
Residence is usually where an individual lives and has practical implications for IT and CGT. The Statutory Residence Test (SRT) introduced in 2013/14 brought two automatic tests: the Automatic Overseas Residence test and the Automatic UK Residence test to determine whether an individual is resident here in the UK for IT and CGT purposes. If neither of these two tests are met, there is a third test, namely the Sufficient Ties Test to determine whether an individual is resident in the UK for IT and CGT purposes.
The current system allows some individuals to maintain non-resident status under specific conditions, often leading to significant tax advantages. However, this is all set to change.
New Rules: Key Changes Coming in April 2025
From 6 April 2025, the rules governing Domicile and Residence are set to change, bringing changes for IT, CGT and IHT.
We summarise below some of the key changes:-
1. New Four-Year Foreign Income and Gains (FIG) Regime
The FIG Regime will replace the current Remittance Basis which allows individuals to only pay tax on the income and gains they make if it is remitted into the UK. The FIG Regime will apply 100% IT and CGT relief on income and gains for new arrivals to this country in their first four years of UK residence, provided that they have at least 10 consecutive years of non-UK residence immediately prior to their arrival. After those four years, the normal tax rules which apply to UK residents will apply to these individuals.
2. Rebasing for CGT
Individuals who previously claimed the Remittance Basis will be able to rebase their foreign capital assets held personally to 5 April 2017 provided they meet certain criteria. They must not have been UK domiciled or deemed domiciled, they must have claimed the Remittance Basis for at least one tax year between 2017/18 and 2024/25, they must have held the asset as at 6 April 2017, must not dispose of the asset until on or after 6 April 2025 and the asset must be situated outside of the UK between 6 March 2024 and 5 April 2025 inclusive.
3. Temporary Repatriation Facility (TRF)
TRF is available to those subject to the Remittance Basis in any tax year up to or including 2024/25. It will be available for three tax years and will allow individuals to remit pre 6 April 2025 foreign income and gains into the UK at a reduced rate of tax; namely 12% for the first two years and 15% for the third year.
4. Inheritance Tax
IHT will no longer be determined on an individual's domicile but instead on their residence. An individual who has been a resident in the UK for 10 out of the last 20 years will be considered a "long-term resident" (LTR) for IHT purposes. The effect being that their Estate will be subject to IHT on their worldwide assets.
The length of an individual's IHT "tail" once they leave the UK is determined by how long they were a LTR in the UK prior to leaving. This will range from 3 years to 10 years.
| Years of UK Residence | IHT Tail in Tax Years |
| 13 or fewer | 3 |
| 14 | 4 |
| 15 | 5 |
| 16 | 6 |
| 17 | 7 |
| 18 | 8 |
| 19 | 9 |
| 20 | 10 |
How These Changes Could Affect You
The above changes are a summary of the main changes but you may wish to refer to the Technical Paper produced by HMRC for a full list of the changes being made:-
https://www.gov.uk/government/publications/reforming-the-taxation-of-non-uk-domiciled-individuals
If you are domiciled or resident (or both) in England and Wales, or if you have ties to the UK, these changes could impact your financial planning, tax position and legal status. For example:
- Non-domiciled individuals may now face taxes on their income or gains.
- Frequent travellers who spend part of the year in the UK may find it harder to maintain non-resident status under the stricter criteria.
- Estate planning strategies that rely on non-domicile status may need to be re-evaluated in light of the reforms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
