UK introduces new tax rules forcing non-domiciled individuals to pay tax on foreign income

The UK has implemented new taxation rules impacting individuals and employees who currently hold non-domicile status. Before 6 April 2025, UK residents who had their permanent home (domicile) outside the UK did not have to pay UK tax on foreign income.

From 6 April 2025, the rules for the taxation of non-UK domiciled individuals has ended. The concept of domicile as a relevant connecting factor in the UK tax system has replaced the remittance basis of taxation with a new tax regime based on ‘residence’ from 6 April 2025.

Previously, UK resident non-domiciles who haven’t become deemed-domiciled could choose to be taxed on the remittance basis. This means that while they pay tax on their UK income and gains in the same way as other UK residents, they only pay tax on their foreign income and gains (FIG) when these are remitted to the UK.

This preferential tax treatment based on domicile status will be removed for all new FIG that arises from 6 April 2025.

From 6 April 2025, all former remittance basis users will pay tax at the same rate as other UK resident individuals on any newly arising FIG like any other taxpayer. Former remittance basis users will continue to pay tax on FIG that arose before 6 April 2025 that they remit to the UK.

However, there is a relief 100% relief on eligible FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in the 10 tax years immediately prior to their arrival (4-year FIG regime).

Therefore, from 6 April 2025, all former remittance basis users who are not eligible for the 4-year FIG regime will pay tax at the same rate as other UK resident individuals on any newly arising FIG like any other taxpayer. Former remittance basis users will continue to pay tax on FIG that arose before 6 April 2025 that they remit to the UK.

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 applies 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.