The UK government's decision to abolish the non-domiciled (non-dom) tax status, effective from 6 April 2025, represents a significant shift in the country's tax landscape. This change aims to create a fairer and simpler tax system by aligning the tax treatment of non-doms with that of UK-domiciled residents.
Understanding UK Domicile
An individual is considered domiciled in the UK if the UK is where they "belong" and consider it their home. This status is typically established through the domicile of their parents, usually their father, at the time of the individual's birth, referred to as the "domicile of origin." Alternatively, a person can acquire a "domicile of choice" by making the UK their permanent home and severing ties with their country of origin. However, obtaining a domicile of choice is not as simple as making a decision—it requires a genuine commitment to changing one's lifestyle to reflect this intention.
For tax purposes, individuals who have been UK residents for 15 of the last 20 years are deemed domiciled in the UK, even if their original domicile lies elsewhere.
It's important to note that domicile is distinct from nationality, residence, or ethnicity, as it focuses solely on where an individual considers their permanent home.
Key Changes and Examples
Domicile will no longer be relevant for determining an individual's tax status. Instead, residence status will be the determining factor.
For Example,
John, a US citizen, has been living in the UK for the past eight years. Under the new rules, he will no longer be able to claim non-dom status from April 2025 and will have to pay tax on his worldwide income and gains, just like any other UK resident.
Individuals who have not lived in the UK for the last 10 years will have a four-year tax holiday when moving to the UK. During this period, they can freely bring their overseas money to the UK without paying tax on it.
For Example,
David, a British citizen, has been living in Australia for the past 12 years. If he decides to move back to the UK in 2025, he will be eligible for the four-year tax holiday. During this period, he can bring his overseas money to the UK without paying tax on it.
After the four-year tax holiday, individuals will pay tax on their worldwide income and gains, just like UK residents.
For Example,
Sarah, a French national, has recently for the first time moved in the UK in December 2024. Under the new rules, she did not pay any tax on her worldwide income and gains for the first four-year from 6 April 2025. After the four years, she will now have to pay the tax as a normal UK resident for all her non-UK income.
Non-doms who are already in the UK will be affected by these changes. However, transitional rules will allow them to remit overseas money to the UK at a 12% flat rate tax over a two-year window (2025/26 and 2026/27) and 15% flat rate for the tax year 2027/28.
Under the new tax regime that will take effect on 6 April 2025, current non-domiciled residents will have a transitional opportunity to remit their overseas income and gains to the UK at a reduced tax rate of 12% during the tax years 2025/26 and 2026/27. The non-doms will have to pay 15% flat rate for the tax year 2027/28. This is designed to ease the transition from the existing non-dom status to the new residence-based tax system.
How It Works
- Eligible Individuals - This applies to those who have been using the remittance basis of taxation, which allowed them to only pay UK tax on UK income and any foreign income or gains they brought into the UK.
- Tax Rate - Instead of paying their normal income tax rates, which can be as high as 45%, individuals can remit foreign income and gains at a flat rate of 12% during this two-year window. For the tax year 2027/28, the flat rate will be 15%.
For Example,
Maria, a non-dom from Italy, has significant investments in stocks and real estate abroad. In 2025, she decides to remit £1 million of her overseas income to the UK. Under the new rules, she would only pay 12% tax on this amount for tax year 2025/26 and 2026/27 and then 15% for tax year 2027/28, which equals £120,000. If she had remitted this money after the three-year window, she could have faced a tax rate of up to 45%, resulting in a potential tax bill of £450,000.
Former remittance basis users will be able to rebase their overseas assets to their value as of 5 April 2017. This means that only the increase in value from 2017 to the date of a future disposal will be subject to UK Capital Gains Tax.
For Example,
Sarah, who has previously claimed the remittance basis, will be able to rebase her overseas assets to their value as of 5 April 2017. This will limit her capital gains tax exposure on future disposals.
Inheritance Tax Changes
The government also plans to introduce changes to Inheritance Tax (IHT) based on residence status. After 10 years of UK residence, an individual will be subject to IHT on their worldwide assets.
Impact on Non-UK Trusts
The Income Tax and Capital Gains Tax protections afforded to non-UK trusts will be removed under the new regime. However, the Inheritance Tax benefits of structures established before 6 April 2025, are confirmed to be retained.
Transitional Measures
The government has introduced transitional measures to mitigate the impact on current non-doms and avoid a mass exodus. These measures include the two-year window for remitting overseas money at a 12% flat rate tax for tax year 2025/26 and 2026/27, then 15% for the tax year 2027/28, and the ability to rebase overseas assets to its 2017 value.
The abolition of the non-dom regime represents a significant change in the UK tax system. While it aims to create a fairer and simpler tax system, the impact on affected individuals will vary depending on their specific circumstances and the length of time they have held non-dom status. Tax and wealth planning advisers will be crucial in helping non-dom navigate these changes and explore options to mitigate the effects of the new regime.
Conclusion
The abolition of non-dom status marks a significant tax shift, requiring careful planning to navigate the new rules effectively. Transitional measures provide some relief, but long-term strategies will be essential for affected individuals.
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