The following article looks at the system that replaces the UK’s resident non-domicile structure that is on the way out. The author argues that there are positives amidst the change.

The UK resident non-domicile system is leaving the stage and being replaced by a new system. Some argue that this will damage the UK in net terms, particularly given the government’s line on inheritance tax. But are there reasons for more optimism about how the change will play out? One person who thinks so is Laura Cullinane, a senior associate at London-headquartered law firm Boodle Hatfield. We know that debate on this issue is far from settled and we welcome comments. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Now that the dust has settled in relation to the changes to the "non-dom" regime, it is worth reflecting on the new regime and some of the "silver linings" that it may offer.  While there will be some losers, some taxpayers will undoubtedly be winners. 

Summary of changes
Now formally legislated in the Finance Act 2025, the changes were announced against a backdrop of criticism of the previous "non-dom" regime. Broadly, "non-domiciled" individuals could claim the remittance basis for UK taxation and would not be subject to UK tax on funds that were retained outside, or not used in, the UK. One justified criticism made of the "non-dom" regime is that taxpayers were incentivised to keep funds outside the UK, discouraging investment in the UK. 

The main takeaways to note are:

-- From 6 April 2025 the "non-dom" remittance basis regime was abolished and replaced with a new residence-based regime, known as the "foreign income and gains regime" or "FIG regime".

-- Under the FIG regime, broadly individuals who have not been UK resident in any of the previous 10 tax years will be exempt from UK tax on their foreign income and foreign chargeable gains ("FIG") for their first four tax years of UK residence. After the four-year period they will be taxed on the arising basis like other UK residents even if the funds are kept abroad.

-- Taxpayers must claim the FIG regime in their tax returns and identify the income and gains for which relief is being claimed.

-- Also from 6 April 2025, "domicile" is no longer a connecting factor for UK inheritance tax ("IHT") purposes. Individuals will only become subject to IHT on their worldwide estates once they have been UK resident in 10 of the previous 20 years (a "long-term resident") and will remain subject to a "tail" of between three and 10 years after ceasing UK residence. 

-- The remittance basis will continue to apply for pre-6 April 2025 income and gains but there is a new transitional protection called the "temporary repatriation facility" ("TRF"). The TRF allows UK residents who were previously remittance basis taxpayers to bring certain unremitted funds to the UK (including funds from overseas trusts) at a lower rate of tax (being 12 per cent in 2025/26 and 2026/27 and 15 per cent in 2027/28). The funds must be designated by the taxpayer in their tax return for the relevant year.

How does this compare with the non-dom regime?
The FIG regime is arguably more favourable for new arrivals because they will not pay UK tax on the qualifying foreign income and gains arising in the first four tax years, whether these funds are remitted or brought to the UK. This is presumably designed to encourage individuals to spend and invest in the UK.

Previously, a "non-dom" claiming the remittance basis regime was subject to UK tax on funds derived from overseas income or gains that were brought to or used in the UK, at the applicable income or capital gains tax rate. The new FIG regime may create an opportunity for individuals wishing to – for example – sell their businesses once they have become UK resident for the first time. It should also provide a favourable regime for those individuals coming to work in the UK temporarily.

The new tax regime should create more certainty for individuals spending time in the UK because the UK statutory residence test is set out relatively clearly in legislation. In comparison, the rules for domicile are derived from decades of case law which left more room for challenge. The residence-based system could allow a globally mobile individual to carefully plan whether to become UK resident.

What about individuals who want to start a life in the UK?
Individuals wishing to come to the UK should seek professional advice before they arrive, in relation to their own personal wealth as well as on interests in companies, trusts (1) or any other structures. The introduction of the TRF may allow taxpayers to bring funds to the UK at a lower rate of tax, which previously they may have not been able to use in the UK without paying a remittance basis charge. This could be timely for those wishing to make UK investments or buy properties in the UK. Advice should be taken to avoid inadvertent remittances of pre-6 April 2025 income and gains outside of this transitional protection.

The individual will need to consider their existing ties with the UK and confirm their historic residence position to check if they can fall within the new FIG regime. They should consider how to fund their stay in the UK and review any directorships or other roles.

Under the new rules an individual may cease UK residence for 10 consecutive tax years and fall outside the scope of IHT on their non-UK situated property (on the basis they are not "long-term resident").  Previously, liability to IHT depended upon the individual's domicile which can have an "adhesive" quality based on connecting factors not necessarily within the individual's control. Those leaving the UK, for example to pursue a career overseas or retire, may benefit from the change to the IHT rules (particularly if they were previously treated as "domiciled in the UK" by being born in the UK). 

The outlook
There will be some long-term residents who have spent time in the UK (but may not have been domiciled or deemed domiciled under the old rules), who are immediately affected by the new rules and implications for their structures.

However, once we have understood how the new rules will apply in practice, it will be interesting to see how the rules play out and if what may be the Treasury's loss could be a new resident's gain. 

Footnote
1, Particularly given new rules on the long-term residence of settlors which is outside the scope of this article.