Policy paper

Reforming the taxation of non-UK domiciled individuals

Published 30 October 2024

Who is likely to be affected

This measure will affect:

• individuals and employees who currently hold non-domicile status and new arrivals into the UK who have non-UK assets or foreign income and gains
• employers who apply for a direction to operate PAYE (Pay As You Earn) on a proportion of UK employment income for employees
• trustees of property settled into trust by individuals who previously had non-domicile status or who change their residence status

General description of the measure

The measure will replace the remittance basis of taxation, which is based on domicile status, with a new tax regime based on residence from 6 April 2025.

The new regime will provide 100% relief on foreign income and gains for new arrivals to the UK in their first 4 years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival (4-year foreign income and gains regime).

The protection from tax on foreign 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 4-year foreign income and gains regime.

Transitionally, for Capital Gains Tax purposes, current and past remittance basis users will be able to rebase foreign assets they held on 5 April 2017 to their value at that date when they dispose of them.

Any foreign income and gains that arose on or before the 5 April 2025, while an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK under the current rules. This includes remittances of by those who are eligible for the new 4-year foreign income and gains regime.

A new Temporary Repatriation Facility will be available for individuals who have previously claimed the remittance basis. They will be able to designate and remit at a reduced rate foreign income and gains that arose prior to the changes. This includes unattributed foreign income and gains held within trust structures. The Temporary Repatriation Facility will be available for a limited period of 3 tax years, from 2025 to 2026. The Temporary Repatriation Facility rate will be 12% for the first 2 years and 15% in the final tax year of operation.

The current domicile-based system of Inheritance Tax will be replaced with a new residence-based system. This will affect the scope of non-UK property brought into UK Inheritance Tax for individuals and trusts. An individual is long-term resident (and in scope for Inheritance Tax on their non-UK assets) when they have been resident in the UK for at least 10 out of the last 20 tax years and then remain in scope for between 3 and 10 years after leaving the UK. Subject to transitional points, any non-UK assets a person put into a settlement will be subject to Inheritance Tax charges at times when the settlor is long-term resident.

The measure extends the period of Overseas Workday Relief to 4 years to align with the new 4-year foreign income and gains regime. The removal of the remittance basis means it will no longer be necessary to keep part of their employment income offshore and in an offshore bank account to benefit from relief.

From 6 April 2025, Overseas Workday Relief will be subject to a financial limit on the amount of relief that can be claimed, this is the lower of £300,000 or 30% of an individual’s total employment income.

Employers or their agents will no longer be required to wait for HMRC to approve their application for a direction to operate PAYE on the proportion of an employee’s employment income for work carried out in the UK.

In addition, individuals will not be able to claim income tax relief on chargeable overseas earnings for income earned on or after 6 April 2025. This relief applied to earnings relating to a foreign employment carried out wholly abroad for those who do not qualify for Overseas Workday Relief. These earnings will continue to be taxable on the remittance basis if brought to the UK after 6 April 2025 and are eligible for the Temporary Repatriation Facility. The exemption to travel costs incurred by non-domiciled employees that are paid for by employers when they come to work in the UK and any business-related travel within the time limit of five years will be reduced to 4 years to align with the 4-year foreign income and gains regime.

Policy objective

The government is committed to addressing unfairness in the tax system, so that everyone who is long-term resident in the UK pays their taxes here. The government will therefore remove the outdated concept of domicile status from the tax system and implement a new residence-based regime which is internationally competitive and focused on attracting the best talent and investment to the UK.

Background to the measure

On 29 July 2024, as part of the Chancellor’s statement on the public spending inheritance, a policy document was published outlining the government’s planned changes to the taxation of non-UK domiciled individuals.

Following this, HMRC hosted a number of listening events to gather views from external stakeholders.

Detailed proposal

Operative date

This measure will come into force on 6 April 2025 in relation to tax charges arising on or after that date.

Current law

The personal tax treatment of non-UK domiciled individuals in the UK tax system is contained within and referenced across a wide range of primary and secondary legislation. This includes the Inheritance Tax Act 1984, the Taxation of Chargeable Gains Act 1992 and a number of further acts dealing with income tax and other areas.

Proposed revisions

Draft legislation published as part of Finance Bill 2024-25 sets out details of the proposed revisions.

Summary of impacts

Exchequer impact (£ million)

2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
—	Negligible	+4,170	+5,895	+2,545	+95

These figures are set out in Table 5.1 of Autumn Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2024.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure affects personal taxation due on individuals or their estates and trustees of trusts.

This measure will impact an estimated 14,800 individuals who will qualify for the 4-year foreign income and gains regime. These individuals will have their foreign income and gains arising during the 4-year period relieved from tax, and their tax treatment will no longer be based on complicated rules based on their domicile.

The experience for an estimated 10,800 employees who will qualify for the 4-year foreign income and gains regime and be able to claim Overseas Workday Relief will improve, as they will no longer have to keep part of their employment income offshore to benefit from the relief.

This measure will impact an estimated 9,300 individuals, who will not qualify for the 4-year foreign income and gains regime, by removing preferential tax treatment based on domicile status for all foreign income and gains that arise from 6 April 2025. These individuals will now need to pay tax on their worldwide income and gains as they arise, in the same way as UK domiciled individuals.

It will also no longer be possible for individuals to take advantage of preferential tax treatment for their overseas trusts as a result of their domicile status. The foreign income and gains in such settlements will be taxed as they arise, in most cases.

For those who will no longer receive preferential tax treatment, customer experience is broadly expected to stay the same as these customers will already be required to declare income through self-assessment and so this will not change the way in which these customers interact with HMRC.

A small number of these individuals, who are long -term resident, will now need to pay Inheritance Tax on non-UK assets held personally. Trustees will pay tax on non-UK assets settled by an individual while they are a long-term resident. Conversely, a small number of non-resident UK domiciled individuals will fall out of scope for Inheritance Tax on non-UK personal or trust assets.

This measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

Non-domiciled individuals are likely to be represented in each of the groups sharing protected characteristics. Where protected groups are overrepresented in either the eligible or ineligible populations, the measure will have a disproportionate impact on that group. However, the impact will be positive for those eligible for the new 4-year foreign income and gains regime and negative for those who are ineligible.

Males (70%) are overrepresented in the population impacted by this measure compared to females (30%), and the proportions are similar across both the eligible and ineligible groups. Overall, there are more people aged 35 to 54 in the population impacted by this measure (55%) compared to the general UK population (26%). There are more people aged 55 and over in the ineligible group (32%) compared to the eligible group (16%).

HMRC doesn’t hold data on any other protected characteristics for this customer group. However, due to the nature of the non-domiciled policy there will be an overrepresentation of non-UK nationalities impacted by this measure both in the eligible and ineligible groups.

Impact on business including civil society organisations

This measure will have a negligible impact on businesses as it concerns taxation of individuals. This measure is not expected to impact civil society organisations.

There is a one-off negligible cost of familiarisation for employers of non-UK domiciled individuals. It is not expected to have any further one-off or continuing costs.

This measure will improve customer experience for an estimated 800 to 1,200 employers by simplifying the HMRC process, no longer requiring employers to wait for HMRC to respond to the request to operate PAYE on a proportion of their employees’ employment income as part of the Overseas Workday Relief claim.

Operational impact (£ million) (HMRC or other)

Changes to IT systems including the Income Tax Self Assessment, online service for employer forms for Overseas Workday Relief and Inheritance Tax processes will be made to implement reforms. Additional staff will also be required to manage compliance activity, which will include customer education, post implementation. These changes are anticipated to cost in the region of £30 million.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored and assessed alongside other measures in the government’s package for personal tax changes.

Further advice

If you have any questions about this change, please email [email protected].