1. Introduction
The recent decision of the government of the United Kingdom (UK) to abolish the time-honored longstanding 225 years old provision of granting non-domicile (non-dom) status heralds a momentous shift in the nation's tax landscape.
This monumental change carries profound legal and fiscal ramifications for both affected individuals and the economy at large. Until now, non-doms enjoyed the privilege of deferring taxes on income and capital gains earned abroad for a period of up to 15 years from their arrival in UK, provided that such funds remained offshore.
However, with the repeal of this provision, individuals holding non-dom status will now find their worldwide income subject to taxation within the UK. This marks a significant departure from previous tax arrangements and underscores the government's commitment to fostering greater fiscal transparency and equity.
2. What are the current rules for non-dom status and their taxation?
The UK government describes non-domiciled residents as "UK residents who have their permanent home ('domicile') outside the UK may not have to pay UK tax on foreign income."1
2.1. Eligibility Requirements for obtaining non-dom status
An individual may obtain non-domicile status in two primary ways. Firstly, through their "domicile of origin", which applies if they were born in a country other than the UK, or if their father originates from a different nation. Secondly, "domicile of choice" allows individuals aged 16 or older to acquire non-domicile status by choosing to depart from the UK and establish indefinite residency elsewhere.
In 2017, revisions were made to the non-dom rules. These changes dictate that individuals are no longer eligible for this status if they have resided in the UK for 15 out of the previous 20 years, or if they meet specific criteria: being born in the UK, having a domicile of origin in the UK, and being a resident in the UK for at least one year since 2017.
2.2. Rules pertaining to taxation of non-dom individuals
Presently, the non-dom individuals have a choice to be taxed either on remittance basis or arising income basis. When an individual opts to be taxed under remittance basis, their foreign income is taxed only when it is brought back into the UK, it is not taxed if it is kept offshore, as opposed to arising income basis wherein such individual is taxed for the income that arises, irrespective of whether such income is brought into the UK or not.
A non-dom individual is by default taxed on arising income basis, and they have to opt to be taxed under remittance basis by claiming it annually in their tax return. However, when such individual chooses to be taxed under remittance basis, they will have to forego all other tax deductions allowances and exemptions available against their UK income. Individuals who hold non-domicile status can claim remittance basis free of charge for first seven years of their residency.
Additionally, individuals earning less than £2,000 annually from foreign sources, who refrain from bringing these funds into the UK, are automatically taxed on remittance basis and they do not need to make any claim towards the same.
2.3. Penalties/ Remittances
Long-term non-dom residents of the UK, who desire to maintain their eligibility for the remittance basis are obligated to pay an annual charge known as the Remittance Basis Charge (RBC) through the self-assessment tax mechanism after paying the following annual charges –
- £30,000 if they have lived in the UK for a minimum of seven of the preceding nine tax years.
- £60,000 if they have lived in the UK for a minimum of twelve of the preceding fourteen tax years.
3. Change in Policy pertaining to Non-Dom Status
3.1. Introduction of the Foreign Income and Gains (FIG) regime
According to the policy paper released on April 23, 2024, titled "Technical note: Changes to the taxation of non-UK domiciled individuals" 2, the present regulations for individuals not domiciled in the UK will cease to exist from April 6, 2025. The concept of domicile, previously pivotal in the tax framework, will now be supplanted by a system centered on tax residency.
However, it is pertinent to note that the non-dom policy is not being completely discarded and certain aspects will still be retained to maintain its essence. The existing remittance basis of taxation will be scrapped and substituted with a new regime called the 4-year Foreign Income and Gains (FIG) regime. Under this new regime, individuals relocating to the UK will not be obligated to pay taxes on their overseas earnings for the initial four years, regardless of whether these funds are transferred to the UK. After this initial period, their tax residency will be determined annually using the Statutory Residence Test, excluding treaty residence, non-residence, and split years. Moreover, if individuals temporarily leave the UK during the four-year period, they can claim exemptions under the 4-year FIG regime upon returning to the UK for the remaining qualifying tax years.
Similar to the current regulations, individuals opting for taxation under the new 4-year FIG regime will forfeit all other tax deductions, allowances, and exemptions applicable to their UK income. Additionally, non-domiciled status holders currently residing in the UK for less than four years can also benefit from this new regime for the remaining period. Conversely, non-domiciled status holders residing in the UK for over four years will be treated as UK tax residents and taxed similarly to domiciled residents.
3.2. Temporary Repatriation Facility (TRF) for existing non-dom individuals
To facilitate the transition outlined in the proposed policy change, non-domiciled individuals residing in the UK for more than four years will be granted some relief through the Temporary Repatriation Facility (TRF)3. This facility introduces a two-year transition period for the tax years 2025-26 and 2026-27, wherein individuals previously taxed under the remittance basis will be encouraged to integrate their foreign assets into the UK tax system. Additionally, they can choose to pay tax at a reduced rate of 12% on remittances of foreign income and gains (FIG) predating April 6, 2025, during the transition period.
Furthermore, as part of the proposed framework, non-dom individuals will be taxed only on 50% of their foreign income in the initial year, 2025-26, to ease the transition through the TRF. However, this provision applies solely to foreign income and cannot be utilized for foreign gains.
4. Implications of the policy change
The UK government's decisive move to phase out the non-domicile (non-dom) tax status by April 2025 signals a seismic shift in the nation's tax landscape, with profound legal and tax consequences for affected individuals and the broader economy.
4.1. Implications of Abolition on Non-dom individuals
Previously, non-doms could limit UK tax liability on foreign income, but the abolition means their worldwide income will now be taxed in the UK. However, now, individuals failing to meet the criteria for the four-year Foreign Income and Gains regime, shall be treated as deemed domiciled individuals, and they will have to forfeit their protections and exemption under taxation.
The abolitions will bring substantial changes to a lot of aspects, however, an aspect of major concern is the divergent tax rates between the UK and other jurisdictions, exacerbating potential tax leakage for non-dom individuals under the new regime. For instance, previously, a UK resident domiciled in India could avoid UK taxes on global income unless brought into the UK. However, now, all income, including that earned in India, will be taxable in the UK. Comparing tax rates between the UK and India reveals significant disparities. While UK's highest band taxes dividends at 40% whereas India's rates for taxing dividends under the India-UK treaty is a mere 10%. Similarly, in UK, other income is taxed at 45%, while in India the tax on other income stands at 40%. Therefore, there is potential tax leakage of 30% on dividends and 5% on other income.
4.2. Macro impacts of the policy change/ Impacts of the policy change on global economy
Beyond individual repercussions, the abolition of non-dom status holds wider economic implications for the UK. Although, as per the Chancellor of the Exchequer, the abolition of non-dom status is projected to generate £2.7 billion annually by 2028-29. Thus, while it is expected to bolster tax revenues by subjecting previously untaxed foreign income to taxation, concerns persist regarding the potential exodus of high-net-worth individuals seeking more favorable tax environments elsewhere.
Nations renowned for low-tax regimes and supportive business climates, such as Dubai, Switzerland, and Singapore, may stand to gain from this policy shift, potentially undermining the UK's position as a global financial centre and challenging its appeal to international investors.
4.3. Impact of the policy change on foreign trusts
Moreover, the abolition also impacts non-resident trusts, reshaping the taxation landscape for income and gains derived within settlor-interested trust structures.
Starting April 6, 2025, the protective shield against taxation on future income and gains within trust setups will be lifted for all existing non-domiciled and deemed domiciled individuals who do not meet the criteria as per the new 4-year FIG regime4. Any income and gains originating from these trusts will be taxed on the UK resident settlor or transferor when realized, resembling the tax treatment for UK domiciled residents.
The Temporary Repatriation Facility (TRF) available to non-dom individuals will not extend to income and gains generated within trusts before April 6, 2025. Income and gains accrued before this date will still be taxed based on their global distribution. Wealthy non-domiciled families utilizing offshore trusts to manage their foreign assets and income should, therefore, reassess their trust structures in light of this change and could also benefit by exploring alternative strategies such as Family Investment Companies to align their wealth with the revised policy.
5. Conclusion
In essence, the UK's decision to abolish non-dom status heralds a new era of taxation, with far-reaching legal, tax, and economic implications. As the country navigates this transition, attention turns to mitigating the impact on affected individuals and ensuring continued competitiveness in the global financial landscape. While the UK Government has on best-effort basis tried to formulate guidelines that will smoothen the transition of the absence of a long-standing policy, expectations regarding how the UK will adjust its currency policies in the wake of this decision focus on striking balance between continuing to yield essential tax revenue and attracting international investments. This adjustment could involve implementing fresh incentives for entrepreneurs and investors, possibly resembling elements of the frameworks seen in countries increasingly popular among the global elite.
Looking ahead, the long-term consequences of this policy change for both the UK and the global financial landscape are profound. As nations vie for global talent and capital, the evolution of tax policies becomes a delicate balancing act. The UK government in its move of ensuring fair taxation will also have to take effective measure to retain its attractiveness as a destination for international wealth and innovation. The actions taken by the UK could prompt other countries to reassess their tax frameworks in response to global trends favoring greater transparency and equity in taxation.
Footnotes
1. https://www.gov.uk/tax-foreign-income/non-domiciled-residents
2. Policy paper, Technical note: Changes to the taxation of non-UK domiciled individuals, dated 23 April 2024 https://www.gov.uk/government/publications/changes-to-the-taxation-of-non-uk-domiciled-individuals/technical-note-changes-to-the-taxation-of-non-uk-domiciled-individuals
3. Supra Note 2
4. Supra Note 2
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