New UK Labour government sets out changes to the taxation of non-doms

The UK Treasury confirmed, on 29 July , that it will be removing the concept of domicile status from the tax system and implementing the four-year residence-based foreign income and gains (FIG) regime, which was originally announced by the previous government at the Spring Budget. It is also committed to ending other ‘advantages for existing non-doms’.

New residence-based regime for foreign income and gains

The government will remove preferential tax treatment based on domicile status for all new FIG that arise from 6 April 2025. To replace the remittance basis of tax, it will introduce a residence-based regime, providing 100% relief on FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival.

From 6 April 2025, the protection from tax on 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 four-year FIG regime.

The government said it further intends to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, to “modernise the rules and ensure they are fit for purpose”. Its intention is to remove ambiguity in the legislation, make the rules simpler to apply and ensure that the measures are effective. It is not anticipated that this review will result in any changes before the start of the 2026/27 tax year.

A form of Overseas Workday Relief (OWR) will be retained. Officials will engage with stakeholders on the design principles for this tax relief and further details will be confirmed in the autumn Budget in October. OWR is currently limited to remittance basis users who work overseas and meet the various conditions for the relief to apply.

Transitional arrangements for existing non-UK domiciled individuals

The policy announced by the previous government, providing a 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime, will not be introduced.

UK resident individuals who are ineligible for the four-year FIG regime, or who choose not to make a claim for a tax year, will be subject to Capital Gains Tax (CGT) on foreign gains in the normal way. Transitionally, for CGT purposes, current and past remittance basis users will be able to rebase foreign capital assets they hold to their value at the rebasing date when they dispose of them. The government is considering the appropriate rebasing date and will set this out at the Budget.

Any FIG that arose before 6 April 2025, while an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK, as is the case under the current rules. This includes remittances of pre-6 April 2025 FIG for those who are eligible for the new four-year FIG regime.

However, a new Temporary Repatriation Facility (TRF) will be available for individuals who have been taxed on the remittance basis. Individuals that have previously claimed the remittance basis will be able to remit FIG that arose prior to 6 April 2025 and pay a reduced tax rate on the remittance for a limited time after the remittance basis has ended. The rate and the length of time that the TRF will be available will be set to make use as attractive as possible.

The government is also exploring ways to expand the scope of the TRF, including to stockpiled income and gains within overseas structures, and will provide further details when the Chancellor delivers her first budget on 30 October.

New residence-based regime for inheritance tax

Inheritance tax (IHT) is currently a domicile-based system. The government intends to replace this with a new residence-based system from 6 April 2025.This will affect the scope of property brought into UK IHT for individuals and trusts.

The government said that the basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event, including death, arises, with provision to keep a person in scope for 10 years after leaving the UK.

The government will engage further with stakeholders on the operation of the new test, so that any refinements can be considered fully. IHT charges arising on deaths occurring before 6 April 2025 will be unaffected by these changes and will be charged according to the existing rules.

The government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT. The government intends to change the way IHT is charged on non-UK assets that are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes in the UK.

The government recognises that trusts will already have been established and structured to reflect the current rules and is therefore considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.

Confirmation of these new rules and their detailed application, including transitional arrangements for affected settlors, will be published at Budget.

The government will not carry out a formal policy consultation on moving to a residence-based system for IHT. Instead, it will review stakeholder feedback provided following the Spring Budget and officials will carry out further external engagement on IHT policy design.

Next steps

Further details on the separate engagement sessions on IHT and OWR, will be published in the future. To ensure that interested parties have an opportunity to share views and feedback on the detail of legislative provisions, the government will share plans in due course.

Current numbers of non-domiciled and deemed domiciled taxpayers

According to estimated figures released by the UK revenue (HMRC) on 9 July, a combined total of at least 83,800 non-domiciled and deemed domiciled taxpayers had combined income tax, capital gains tax (CGT) and national insurance contributions (NICs) liabilities of £12.3 billion in the tax year ending 2023.

This was up 6% from 78,800 taxpayers and down 1% from £12.4 billion in liabilities in the previous tax year, making it the second-largest annual tax liability from this group since these figures began in 2018.

The number of people claiming non-domiciled taxpayer status rose to 74,000 in the tax year ending 2023, up from 68,900 in the tax year ending 2022. This increase, said HMRC, was largely due to rising numbers of newly arrived non-doms after the end of pandemic-related travel restrictions in 2022.

The number of newly arrived non-domiciled taxpayers increased to 12,900 in tax year ending 2023, up 18% from 10,900 in tax year ending 2022. At around £8.9 billion, the total revenue from non-domiciled taxpayers was £474 million, or 6%, higher than in tax year ending 2022, and at its highest level since tax year ending 2017.

In addition, some 9,800 individuals who claimed ‘deemed domiciled’ taxpayer status paid £3.4 billion of income tax, CGT and NICs on worldwide income and liable gains, down from £4 billion the previous year.