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

The UK government has unveiled plans to replace the existing resident non-domicile (non-dom) tax regime with a new system called Foreign Income and Gains (FIG), set to take effect in April 2025. This decision follows the prior administration’s March 2024 announcement to eliminate the remittance basis and the concept of domicile.

A technical note issued by HM Treasury provides guidance to the individuals and professionals affected. The government underlines that "this technical note outlines the major changes that will apply from 6 April 2025 to the taxation of non-domiciled individuals already residing in the UK and other individuals who have been non-UK residents and relocate to the UK."

New Residence-Based Inheritance Tax System

Chancellor of the Exchequer Rachel Reeves announced that the inheritance tax (IHT) protections for current trusts established by non-doms will end. A new residence-focused IHT system will be introduced starting 6 April 2025. The new system’s main criterion will determine whether an individual has been a UK resident for ten years prior to the tax year of the chargeable event, with a clause extending the scope ten years after leaving the UK. The government expresses that "from 6 April 2025, it plans to shift inheritance tax from a domicile-based system to a residence-based one. This change will be open to consultation."

Jimmy Sexton, Founder & CEO of Esquire Group, believes "the UK is making every wrong financial decision possible. First, Brexit. Second, they removed tax-free shopping for non-residents." He refers to a report highlighting that "dropping tax-free shopping cost the UK GBP 11 billion as shoppers choose destinations like Paris and Geneva where VAT-free shopping is still available."

Effects on Existing Trusts

The new tax structure will significantly affect individuals with existing trusts, particularly those established by non-domiciled individuals before 6 April 2025. Under current regulations, non-UK assets settled by a non-UK domiciled settlor are generally "excluded property" and not liable for UK IHT. HM Treasury has noted that the existing inheritance tax treatment will remain for any non-UK property settled by a non-UK domiciled settlor before 6 April 2025, suggesting that current excluded property trusts may retain their IHT protection. This is, however, subject to any potential anti-avoidance measures the government may introduce. The technical note also states that "new trusts and additions to existing trusts by a non-UK domiciled settlor on or after 6 April 2025 will adhere to new residence-based rules," meaning 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 asserts that "abolishing the non-dom regime will further harm their tax revenues," explaining that "the major benefit of the non-dom regime was that foreign income wasn't subject to UK income tax unless remitted to the UK, and foreign assets weren't liable for UK inheritance tax."

Settlors not eligible for the new four-year Foreign Income and Gains (FIG) system will encounter 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 system will lose the tax protection on income and gains within settlor-interested trust structures.

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

Though acknowledging that "only a minority of non-doms are wealthy and truly benefit from the regime," Sexton argues that "the UK benefits as well." He emphasizes that "the wealthy non-doms spend money in the UK, and the businesses earning that income employ people and pay UK taxes," noting, "they also contribute significantly in VAT on their expenditures in the UK."

Four-Year FIG Regime and Transition Provisions

The four-year FIG system will enable individuals who were not 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, those who qualify for the new four-year Foreign Income and Gains (FIG) system will not face tax on FIG gained during the first four tax years after becoming UK tax residents. These individuals can bring these funds into the UK without incurring additional charges and will not be taxed on distributions from non-resident trusts during this period.

The new four-year FIG system, despite its benefits for newcomers, "is nowhere near as appealing as the current non-dom regime," according to Sexton. He also mentions, "to my knowledge, current non-doms cannot benefit from the new regime."

The transition provisions from the previous government will persist, except for the one-year 50%.