Policy paper

Technical note: Changes to the taxation of non-UK domiciled individuals

Updated 23 April 2024

This was published under the 2022 to 2024 Sunak Conservative government

From 6 April 2025, the current rules for non-UK domiciled individuals will end. The concept of domicile as a relevant connecting factor in the tax system will be replaced by a system based on tax residence.

1. Who should read this? 

This technical note describes the main changes that will apply from 6 April 2025 to the taxation of non-domiciled individuals already resident in the UK and other individuals who have been non-UK resident and move to the UK. It is aimed at affected individuals and practitioners. 

This note does not describe the detailed consequential changes that will be required because of moving to a residence based tax system. These will be covered in further updates and draft legislation that will be published later in the year for technical comments. Some points of detail concerning inheritance tax will be settled after consultation with representative bodies and other interested parties.

2. Summary of changes 

From 6 April 2025, the current remittance basis of taxation will be abolished for UK resident non-domiciled individuals. This will be replaced from 6 April 2025 with a new 4-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of 10 tax years of non-UK residence. Qualifying individuals will not pay tax on FIG arising in the first 4 tax years after becoming UK tax resident and will be able to bring these funds to the UK free from any additional charges. They will not pay tax on non-resident trust distributions either. They will pay tax on UK income and gains, as is the case for non-domiciled individuals now. 

Individuals who on 6 April 2025 have been tax resident in the UK for less than 4 years (after 10 years of non-UK tax residence) will be able to use this new regime for any tax year of UK residence in the remainder of those 4 years. 

Overseas Workday Relief (OWR) for the first 3 tax years of UK residence will be retained and simplified. From 6 April 2025 eligibility for OWR will be based on an employee’s residence and whether they opt to use the new 4-year FIG regime.  

From 6 April 2025, the protection from taxation on future income and gains as it arises within trust structures (whenever established) will be removed for all current non-domiciled and deemed domiciled individuals who do not qualify for the new 4-year FIG regime. FIG arising in non-resident trust structures from 6 April 2025 will be taxed on the settlor or transferor (if they have been UK resident for more than 4 tax years) on the arising basis. This is the same basis on which trust income and gains are taxed on UK domiciled settlors or transferors under the current regime.  FIG which arose in the trust or trust structure before 6 April 2025 will be taxed on settlors or beneficiaries if they are matched to worldwide trust distributions. 

Individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new 4-year FIG regime will, for 2025-2026 only, pay tax on 50% of their foreign income. This reduction applies to foreign income only; it does not apply to foreign chargeable gains. For 2026-27 onwards, tax will be due on all worldwide income in the normal way.   

From 6 April 2025, an individual who is not, or who later ceases to be, eligible for the new 4-year FIG regime will be taxed on foreign gains in the normal way. Transitionally, individuals who have claimed the remittance basis will, on a disposal of an asset held personally at 5 April 2019, be able to elect to rebase that asset to its value as at that date. 

From 6 April 2025, individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittances of pre-6 April 2025 FIG under a new Temporary Repatriation Facility (TRF) that will be available for tax years 2025-26 and 2026-27. TRF will not apply to pre-6 April 2025 FIG generated within trusts and trust structures. 

From 6 April 2025 the government intends to move inheritance tax from a domicile based regime to a residence based regime. This will be subject to consultation.

3. The new regime for income and capital gains tax 

3.1 4-year FIG regime overview 

From 6 April 2025, a new regime for personal FIG will be available to individuals for the first 4 tax years once becoming UK tax resident after a period of 10 years non-UK tax residence. Eligible individuals will not pay tax on FIG arising in the first 4 years, where a claim is made, and will be able to remit these funds to the UK free from any additional charges. Under the new regime individuals will not be required to track the movement of their FIG through investments in the way they are required to do now under the current regime. This will make the new 4- year FIG regime much simpler than the remittance basis regime.  

The Statutory Residence Test will be used to determine tax residence for any one tax year. Treaty residence or non-residence and split years will be ignored.  

If an individual chooses to be taxed under the new 4-year FIG regime, they will lose entitlement to personal allowances and the capital gains tax annual exempt amount. 

Claims to use the new 4-year FIG regime are to be made for each year to which it is to apply. Individuals need not make a claim for every year of the 4-year period. For example, an individual who makes a claim for the new 4-year FIG regime in year 1 but chooses not to make a claim for year 2 will still be able to claim for years 3 and 4. 

If an individual leaves the UK temporarily during the 4-year period they will be able to make a claim under the 4-year FIG regime for any of the qualifying tax years remaining on their return to the UK. For example, if someone becomes non-UK resident in year 2 and 3 but is UK resident again for year 4, they will be able to use the new 4-year FIG regime for year 4. 

Individuals who on 6 April 2025 have been tax resident in the UK for less than 4 years (after a period of 10 years non-UK tax residence) will be able to use this new regime for any tax year of UK residence in the remainder of those 4 years. For example, an individual who became resident in the UK in 2022-23, after a 10-year period of non-residence, will have been resident in the UK for up to three tax years on 6 April 2025. They will be able to claim under the new 4-year FIG regime for 2025-26 because this is their fourth year following a period of 10 years non-UK tax residence.

3.2 Overseas Workday Relief 

Relief will continue to be available for employees who opt to use the new 4-year FIG regime. The new Overseas Workday Relief (OWR) will be like that currently available, providing relief on earnings for employment duties performed outside the UK. The new OWR will be available for the first 3 tax years of UK residence. Employees who are eligible for OWR in 2023-24 or 2024-25 for their first year since returning to the UK should still be able to claim OWR for the full three years. However, those re-entering from 2025-26 will not be able to claim OWR, if they are not eligible for the FIG regime. 

The new OWR will provide relief from income tax whether or not these earnings are brought to the UK. As under the current rules, the new OWR will not provide relief from National Insurance contributions (NICs), so any NICs liabilities on these earnings will be determined as usual.

3.3 Trust Protections 

From 6 April 2025, the protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the new 4-year FIG regime. FIG arising in the trust (whenever established) from 6 April 2025 will be taxed on the settlor on the same basis as UK domiciled settlors at present, unless the settlor is eligible for the new 4-year FIG regime. 

From 6 April 2025 the matching of pre-6 April 2025 FIG to trust distributions will continue, but UK resident non-domiciled individuals will no longer be entitled to the remittance basis in respect of worldwide trust distributions. Beneficiaries and settlors who are within the 4-year FIG regime will also be able to receive benefits from 6 April 2025 free from any UK tax charges whether or not the benefits are received in the UK. However, such benefits are not matched to trust income and gains and will be subject to a modified onwards gift rule.

3.4 Reduced amount of foreign income subject to tax 

There will be a one-year reduction in the amount of foreign income that will be subject to tax for individuals who move from the remittance basis to the arising basis from 6 April 2025 and who are not eligible for the new 4-year FIG regime. For these individuals only 50 percent of the foreign income arising in 2025-26 will be subject to tax. The reduction in the amount of foreign income subject to tax will apply for one tax year only and the reduction will not apply to foreign chargeable gains.

3.5 Capital Gains Tax rebasing 

From 6 April 2025, an individual who is not, or who later ceases to be, eligible for the new 4-year FIG regime will be taxed on foreign gains in the normal way. 

Transitional rules will apply for individuals who have claimed the remittance basis and are neither UK domiciled nor UK deemed domiciled by 5 April 2025. If, on or after 6 April 2025, they dispose of a personally held foreign asset that they held at 5 April 2019, they will be able to elect to rebase that asset to its value as at 5 April 2019. This rebasing will be subject to conditions that will be set out later.

3.6 Temporary Repatriation Facility (TRF) 

A new 12% rate of tax will be introduced for remittances of FIG made in tax years 2025-26 and 2026-27 where the FIG arose to the individual personally in a year when the individual was taxed on the remittance basis and the individual is UK resident in the relevant tax year.  

There will be some relaxation of the mixed fund ordering rules to make it easier for individuals to take advantage of the TRF if, for example, they have FIG in a mixed fund or they are unable to precisely identify the quantum of their FIG.  

From 2027-28 remittances of pre-6 April 2025 FIG will be taxed at normal tax rates.

4. Ending the existing income tax and capital tax regime 

The remittance basis of taxation will be abolished for UK resident non-domiciled individuals from 6 April 2025. The last year for which a remittance basis claim can be made will be the 2024-25 tax year. 

FIG that has arisen to a remittance basis user prior to 6 April 2025 will continue to be taxed if they are remitted on or after 6 April 2025, subject to the TRF set out above. 

Business Investment Relief will be available for qualifying investments of pre 6 April 2025 FIG made on or after 6 April 2025 and will continue to be available for qualifying investments made prior to 6 April 2025.

5. Inheritance tax 

Inheritance tax (IHT) is currently a domicile-based system. The government intends to move IHT to a residence-based system, subject to consultation and applying this only from 6 April 2025. 

Current IHT treatment will continue for any non-UK property that is settled by a non-UK domiciled settlor and becomes comprised in a settlement prior to 6 April 2025. New trusts and additions to existing trusts made by a non-UK domiciled settlor on or after 6 April 2025 will be subject to new residence-based rules.

5.1 Current rules – Property owned outright 

The scope of IHT for assets owned outright is currently broadly based on the situs of assets (with UK assets being subject to IHT, with some limited exceptions) and a person’s domicile or deemed domiciled status at the date of the tax charge. 

A person is deemed to be UK domiciled for three years after they lose their UK domicile. 

If a person is UK resident for 15 out of the last 20 tax years, they are deemed to be UK domiciled, and remain deemed domiciled until their fourth year of non-UK residence. 

If a person is a formerly domiciled resident, they are deemed to be UK domiciled. A formerly domiciled resident is an individual with a UK domicile of origin who was born in the UK, is resident in the UK and was also resident for one of the last two tax years. 

If a person is UK domiciled or deemed domiciled, they are liable for IHT on their worldwide assets. 

If a person is non-UK domiciled, they are liable for IHT only on UK assets, including UK residential property held through foreign entities.

5.2 Current rules – Property held in trust 

The scope of IHT for assets comprised in a settlement is currently broadly based on the situs of the assets (with UK assets being subject to IHT, with some limited exceptions) at the date of the tax charge and the domicile of the settlor (the person who adds assets to a trust) at the time when the assets became comprised in the settlement. 

Worldwide assets settled by a UK domiciled or deemed domiciled settlor are subject to IHT. 

UK assets settled by a non-UK domiciled settlor are subject to IHT. Non-UK assets settled by a non-UK domiciled settlor are currently “excluded property” under section 48(3) of the Inheritance Tax Act 1984 and not subject to IHT unless it is an interest in a foreign entity that owns UK residential property, or where the settlor is a formerly domiciled resident in the year the IHT chargeable event arises.

5.3 The position from 6 April 2025 – Property owned outright 

It is envisaged that the new rules will involve charging IHT on worldwide assets owned outright when a person has been resident in the UK for 10 years (the “residence criteria”), with a provision to keep a person in scope for 10 years after leaving the UK (the “tail” provision). The design of the system (including consideration of further criteria such as other connecting factors) will be subject to consultation. UK situs assets will remain in charge on the same basis as at present, regardless of residence.

5.4 The position from 6 April 2025 – Property held in trust 

It is envisaged that the new rules for chargeability of assets comprised in a settlement will depend upon whether a settlor meets the residence criteria or is within the tail provision at the time the assets are settled and/or when charges such as 10-year anniversary charges or exit charge arises.  

The design of the system (including consideration of further criteria such as other connecting factors) will be subject to consultation. UK situs assets will remain in charge on the same basis as at present, regardless of residence.  

The treatment of non-UK assets that are settled by a non-UK domiciled settlor and become comprised in a settlement prior to 6 April 2025 will not change. For these settled assets:   

• provided the assets in the settlement continue to meet the legislative requirements to be excluded property under current legislation, and subject to any future anti-avoidance provisions, there will be no IHT charges; and 
• the interaction between the gift with reservation provisions and excluded property trust rules will also remain, meaning excluded property will not be brought into charge on the settlor’s death even if the settlor retains a benefit in the trust assets.  

The exception to this is that the treatment of non-UK property comprised in a settlement that currently comes back into scope where the settlor is a formerly domiciled resident (see above) will be subject to consultation.

5.5 The IHT consultation 

The IHT consultation will deal with the design of a new residence based system to apply from 6 April 2025. There are a number of detailed issues and interactions that will be consulted on, such as transitional provisions, the length of the residence criteria and tail provision, any connecting factors other than residence, gifts with reservation, domicile elections, formerly domiciled residents and calculation of trust charges.

6. What to do if you have questions or concerns 

Further updates and draft legislation will be published later in the year for technical comments. Some points of detail concerning IHT will be settled after consultation with representative bodies and other interested parties. 

If you have any queries or comments about any of the points raised in this Technical Note, then please email [email protected]. 

During the development of this policy, we will not be able to respond to emails directly. Instead, we will use those comments when considering future updates to the Technical Note and other releases. This will help ensure that the same information is made available to all interested parties at the same time. 

Customers with questions about their own tax affairs should contact HMRC in the usual way.