UK to Replace Non-Dom Tax Regime with Foreign Income and Gains System

The UK government has announced plans to replace the resident non-domicile (non-dom) tax regime with a new four-year Foreign Income and Gains (FIG) system, effective April 2025. This move follows the previous administration’s announcement in March 2024 it would abolish the remittance basis and the domicile concept.

The technical note released by HM Treasury aims to provide guidance to affected individuals and practitioners. The government highlights that “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 residents and move to the UK.”

New residence-based inheritance tax regime

Chancellor of the Exchequer Rachel Reeves declared that inheritance tax (IHT) protection for existing trusts settled by non-doms would cease. The government will introduce a new residence-based IHT regime effective 6 April 2025.

The new regime’s primary criterion is whether an individual has been a UK resident for ten years before the tax year of the chargeable event, including a provision extending the scope to ten years post-departure from the UK.

The government emphasizes that “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.”

Jimmy Sexton, Founder & CEO of Esquire Group, believes “the UK is making every wrong financial decision possible. First, Brexit. Second, they eliminated tax-free shopping for non-residents.” He cites an article claiming that “the abolition of tax-free shopping has cost the UK GBP 11 billion as shoppers opt for places like Paris and Geneva, where they can still shop VAT-free.”

Implications for existing trusts

The new tax framework will have considerable implications for individuals with existing trusts, particularly those settled by non-domiciled individuals before 6 April 2025.

Under the current rules, non-UK assets settled by a non-UK domiciled settlor are generally considered “excluded property” and not subject to UK IHT.

HM Treasury has indicated that the current inheritance tax treatment will remain in place for any non-UK property settled by a non-UK domiciled settlor and included in a settlement before 6 April 2025. This suggests that existing excluded property trusts settled before this date may retain their inheritance tax protection, although this is subject to any future anti-avoidance provisions that the government may introduce.

However, the technical note also mentions that “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,” indicating that any new assets added to existing trusts or new trusts created by non-domiciled individuals after 5 April 2025 will fall under the new residence-based IHT regime.

Sexton argues that “abolishing the non-dom regime will further hurt their tax revenues.” He explains that “the significant benefit of the non-dom regime was that foreign income was exempt from UK income tax unless remitted to the UK, and foreign assets were exempt from UK inheritance tax.”

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Settlors who do not qualify for the new four-year Foreign Income and Gains (FIG) regime will face changes in the taxation of trust income and gains. From 6 April 2025, non-domiciled and deemed domiciled individuals who do not qualify for the new four-year FIG regime will no longer be protected from tax on income and gains arising within settlor-interested trust structures.

This means settlors who have been UK residents for more than four tax years will be subject to income tax and capital gains tax on trust income and gains arising from 6 April 2025, even if the trusts were established before this date.

While acknowledging that “only a minority of non-doms are wealthy and truly benefit from the regime,” Sexton maintains that “the UK benefits as well.” He points out that “the wealthy non-doms spend money in the UK, and the businesses that receive that income employ people and pay UK income taxes,” adding, “they also pay a lot in VAT on the money they spend in the UK.”

Four-Year FIG regime and transitional provisions

The four-year FIG regime will allow individuals who have not been UK residents for the ten years preceding the 2025/26 tax year to remit FIG tax-free to the UK for up to four years.

According to HM Treasury, individuals who qualify for the new four-year Foreign Income and Gains (FIG) regime will not be subject to tax on FIG arising in the first four tax years after becoming UK tax residents. These individuals will be able to bring these funds to the UK without incurring any additional charges. They will also not be required to pay tax on distributions from non-resident trusts during this period.

The new four-year FIG regime, while offering benefits for new arrivals, “is hardly as attractive as the current non-dom regime,” according to Sexton. He also notes that “as far as I can tell, current non-doms cannot take advantage of the new regime.”

Transitional provisions from the previous government will continue, except for the one-year 50% reduction in foreign income taxation for those in the UK for fewer than 15 years.

HM Treasury has explained that individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new four-year Foreign Income and Gains (FIG) regime. For the 2025-2026 tax year only, these individuals must pay tax on 50% of their foreign income. It is important to note that this reduction applies exclusively to foreign income and does not extend to foreign chargeable gains.

The temporary repatriation facility (TRF) will remain, with more details to come in the Budget on 30 October 2024. The government will review complex anti-avoidance legislation for offshore trusts, with any changes effective from 6 April 2026 at the earliest.

The technical note mentions that “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.”

Sexton predicts the UK “will lose most of their wealthy non-doms” due to this change. He reveals that “every single one of my non-dom clients is leaving, and I know this is true for other advisors’ clients as well.” He believes “money will go where it is welcome, and it isn’t welcome in the UK anymore.”

While existing excluded property trusts may retain some IHT protection, individuals with trusts settled by non-domiciled individuals should carefully review their trust arrangements and seek professional advice to understand the full implications of the new tax regime on their specific circumstances.

The government has announced a consultation process to address the design of the new residence-based system, transitional provisions, and other detailed issues.

Sexton concludes that “the abolition of the non-dom regime may have been a good political decision to get elected, but it was a bad financial decision.” He predicts that “the big winners will be the UAE, Italy, and Switzerland,” highlighting Italy’s recent announcement to “double its flat tax from EUR 100k to EUR 200k” as evidence that “they know that Italy is one of the few options for non-doms who want to stay in Europe.”