Updated on: May 9, 2024
We have a number of clients who are not originally from the UK. Back in 2005 when we started our business a significant proportion of our overall client base came from New Zealand, Australia, and South Africa. This has now changed. Not only do we support a large number of British clients, but we also provide tax and accountancy services to UK based contractors who were originally from 28 different countries.
These clients who were originally from overseas all have one thing in common. The UK is not their domicile and sometimes they have been able to benefit from this non-dom tax status. The non-dom tax rules are changing in April 2025, and they are changing significantly! So if you live in the UK, but are not from the UK, and you have any forms of overseas income from bank interest in an overseas bank account, or dividends you may be receiving from a company outside of the UK, or you may own property or shares or other assets back in your home country that you plan on selling, then this article is for you.
Politics is also important here. Although no date has yet been set for the next UK election, it is expected to be held sometime in the second-half of 2024. The proposed non-dom tax changes have been proposed by the current Conservative government. If Labour win the next election, it is expected they will take the proposed non-dom tax changes even further. So, either way, change is coming – we’re just not clear at the moment what the final changes will be.
What is non-dom status, and how could it affect your taxes in the UK? Catering to individuals whose permanent domicile isn’t in the UK, non-dom status allows for a different tax treatment on foreign income. Understand the intricacies, benefits, common misconceptions, and get ready for substantial legislative changes starting April 2025 throughout this article.
Key Takeaways
- The current non-dom status in the UK offers tax benefits as non-domiciled individuals are taxed only on their UK income, with foreign income tax-exempt unless it is brought into the country.
- The remittance basis of taxation for non-doms will change in April 2025. It will be completely replaced with a brand-new system for taxing overseas income that is based on tax residency, and not domicile.
- The proposed changes align better with how many other countries tax foreign income, and is a significant simplification of the UK tax system for foreigners moving to the UK.
- Be forewarned about the potential nightmare scenario for Kiwis moving to the UK.
What is Non-Dom Status?
Non-dom status is a tax category designed for individuals who live in the UK but have a permanent home in another country. This status follows a specific set of rules that distinguish these individuals from UK residents.
Definition and Criteria
Non-dom status centers around the concept of ‘domicile,’ which is different from simply being a resident or a citizen. Domicile can be an inherited status from birth or can be established by making a significant move to a new country.
To qualify for non-dom status, one must demonstrate strong connections to another country, often including plans to return there in the future.
For example if you were born and raised in New Zealand, and consider New Zealand your ‘homeland’, and you moved to the UK when you were 23 years old to work, you will be a non-dom for tax purposes in the UK.
Tax Benefits
Generous tax benefits often root the allure of claimed non-dom status. Non-doms are obliged to pay UK tax solely on their UK-sourced income, a provision that shields their foreign fortunes from the UK’s taxman’s grasp. Yet, the moment foreign income arrives on the UK shores, it becomes subject to the usual UK tax laws. As a UK tax resident, understanding the implications of non-dom status is crucial to ensure compliance with UK tax regulations on foreign income.
Overseas investments and assets find a fiscal sanctuary in this system, allowing worldwide income to grow in international soils.
Common Misconceptions
Amid the complexities of finance, non-dom status is sometimes mistakenly seen as just a means for tax avoidance. However, it is a legitimate tax category, clearly defined in the law, and requires adherence to UK tax regulations. It’s important to note that not all non-doms benefit from reduced taxes as they are still required to pay taxes on their UK income.
These taxpayers must navigate the tax system with due diligence during the tax year, for any misstep could result in a maelstrom of penalties and back taxes when they pay tax.
The Current Non Dom Tax Landscape
As changes loom over the non-dom regime, it’s critical to grasp the remittance basis of taxation. This option, available to non-UK domiciled individuals, allows them to keep their overseas income and gains tax-free in the UK, as long as these funds are not brought into the UK. However, choosing this taxation method comes with specific conditions and caveats that are vital for preserving the integrity of the UK’s tax system.
Remittance Basis
If you are not domiciled in the UK, and you have overseas income or gains, you can shield these from the UK tax man by claiming the remittance basis. However, there are some hooks. Let’s take a look at the detail.
What Does Remittance Mean?
Technically speaking (from the HMRC), a remittance is any money or other property, which is, or which derives from your offshore income and gains which are (a) brought to (b) received (c) used, either directly or indirectly in the UK, for your benefit or the benefit of any other relevant person (mainly spouse, partner, children or grandchildren).
And if you claim the remittance basis on overseas income/gains and do not pay any UK tax on them, then those funds can never be brought into the UK. There is no time limit on this. If eventually you do remit the overseas income or gains to the UK they become taxable in the UK at that point.
This does not apply to savings that you hold overseas. If you transfer your savings into the UK, they are not subject to these rules, because they are neither income nor gains. It’s simply you transferring your savings from one country to another. However, it’s important to note that if the savings have accrued interest income overseas while you’ve been in the UK, and you decide to transfer your savings to the UK, ensure your records clearly show that you are transferring only some of the original principal amount, and leaving behind any earned interest. This is key to avoiding unintended tax implications under the remittance rules.
Income and Gains under £2,000
If you have overseas income and gains totalling under £2,000 in the tax year, and those funds are not brought into the UK, then you don’t need to do anything. There is no impact on your UK tax position, and you don’t need to include this income on your UK tax return. This small amount of income/gains stays out of the UK net – but remember, under the remittance basis the funds can never be brought into the UK. This is nice tidy way of keeping a little bit of foreign income off your UK tax return, making your UK tax reporting just that little bit simpler.
Income and Gains over £2,000
If your foreign income/gains exceed £2,000 in a tax year, then the picture changes significantly, and you now need to consider the impacts of using the remittance basis along with any potential tax savings that might be achieved. If you want to use the remittance basis you need to declare it on your UK tax return, and in turn you lose your UK personal allowance and capital gains tax annual exempt amount for the year.
Let me illustrate this with an example. If you earn £60,000 per year in the UK through normal PAYE employment, and you earn say £3,000 in overseas income, and you want to use the remittance basis to keep that income off your UK tax return, then you lose your personal allowance. This increases your UK tax bill on your annual salary by just over £5,000, so in this case it would probably be better to not claim the remittance basis and instead report that overseas income on your UK tax return. This is because the UK tax you would pay on £3,000 of foreign income will be less than £5,000.
If however you had foreign income and gains of £100,000, and you do not plan on remitting those funds to the UK at any point, then the remittance basis will be better for you. You effectively pay £5,000 more in tax on your UK salary (because you lose your personal allowance), but you don’t need to pay any UK tax on your £100,000 unremitted foreign income.
Remember though if you are going to use the remittance basis for your foreign income and gains, then the funds cannot be remitted to the UK at any point. If you do bring the income/gains into the UK, you they would be taxed normally on this at the current UK tax rates.
So if for example you have foreign income of £100,000, and you use the remittance basis to keep that income off your UK tax return, and that you plan on remitting those funds to the UK in two years’ time, there is no point using the remittance basis in the first place. You should just report that foreign income on your UK tax return in the year that it is earned because there is no tax to be saved in using the remittance basis in this example.
Remittance Basis Charge
The longer you live in the UK as a non-dom, the more restrictive the non-dom tax rules become. If you have lived in the UK for at least seven of the last nine years, and you want to claim the remittance basis, then you lose your personal allowance and capital gains tax annual exempt amount as above, PLUS you also need to pay the HMRC an annual fee of £30,000 for each year you are using the remittance basis (this is called the Remittance Basis Charge (RBC)). For the level of foreign earnings that our typical clients have, the RBC is so high that it usually takes the remittance basis option off the table.
If you have lived in the UK for at least 12 of the previous 14 tax years, this charge increases to £60,000.
And if you live in the UK for a duration in excess of this, then you are deemed domiciled in the UK and you can no longer use the remittance basis.
One must make the choice of the remittance basis with precision, declaring it annually on their tax return unless they have modest unremitted foreign income and gains. As the years of UK residence accumulate, so do the costs associated with this election, with an annual charge levied on those who have basked in the UK’s embrace for over seven years, including capital gains tax implications for capital gains tax purposes.
However, as the sands of time shift, the remittance basis as we know it is destined to dissolve with the dawn of April 2025.
Upcoming Changes to Non Dom Rules
The non-dom regime is poised for significant changes starting April 2025. These upcoming revisions are expected to alter the tax landscape considerably, and non-doms are anticipated to contribute a significant amount to the UK’s treasury by the fiscal year 2028/29.
These rules are not yet set in stone, but we have a pretty good indication of how they will look.
Abolishment of Tax Breaks in 2025
The new FIG regime (Foreign Income and Gains) will mark the end of an era, sweeping away the remnants of the domicile-based system in favor of a regime rooted in UK tax residence. This paradigm shift will introduce a new UK inheritance tax framework, imposing the taxman’s reach on global assets for those who have settled in the UK for a decade, becoming a UK resident. Both the remittance basis and domicile will be completely written out of the legislation.
The updated regime, starting from April 2025, stipulates that it will only be accessible to individuals who have not been UK residents for at least the last ten tax years. However, those who qualify and have been a UK tax resident for fewer than four tax years by April 6, 2025, will be eligible to apply the new rules for the remainder of the four-year term. After this period, individuals will be subject to tax on their worldwide income and gains based on the standard tax rules applicable to UK residents.
So, if you arrive in the UK on 10 April 2025, you will be able to live under the new FIG rules for four years. If you arrived on 10 April 2022, you would have one year of using the FIG rules, and if you arrived before 06 April 2021 then you won’t be able to take advantage of these rules at all.
New Arrivals’ Taxation
To new arrivals, the incoming regime extends an olive branch, granting a grace period where UK tax shelters their foreign income and gains for up to four years. This policy is a welcoming gesture, designed to attract fresh talent and investment to the UK’s shores, while aligning with international tax practices.
At first glance this looks great. For four years you will be able to remit any foreign income or gains into the UK completely free of any UK tax. However, the cost of using the FIG regime will be the loss of your personal allowance and capital gains tax annual exempt amount. This means the amount of tax you currently pay in the UK, and the size of your overseas income/gains will determine whether it’s beneficial to use the new FIG regime. For most of our clients with foreign income, the FIG regime will not provide any overall tax benefits, and it will be likely the best scenario will be to declare all worldwide income on their UK tax return each year.
Often our non-dom clients have a little bit of overseas income, and from 06 April 2025 onwards the £2,000 exemption will no longer apply. So, if you move to the UK from, say, Australia, and have some interest income and dividend income in Australia totalling £1,500 per year, and you keep those funds in Australia, you will still need to report them on your UK tax return. It will be a bit of an admin headache because so many of our clients not originally from the UK typically have a little bit of income (dividends, savings interest) back in their home country.
And before you ask, yes, the HMRC and foreign tax offices do communicate with each other and share information. In the last two months we have helped two new clients not originally from the UK who received letters from the HMRC to say they have become aware of potentially unreported foreign income based off information received from the foreign tax offices.
Lastly, if you arrive in the UK after 05 April 2025 as a non-dom, having previously lived in the UK at some point in the last 10 years, the FIG regime will not be available, and you will simply be required to report all of your worldwide income on a UK tax return every year.
Temporary Repatriation Facility (TRF)
A transitional period will provide some relief for non-doms currently using the remittance basis. This phase includes reduced tax rates and a Temporary Repatriation Facility, making the shift less jarring. Strategic tax planning will be essential for non-doms to effectively navigate through these upcoming changes.
This is like a foreign income/gains tax amnesty. If you have been keeping your foreign income and gains offshore and used the remittance basis to keep them outside the UK tax net, then you have two years (2025/26 and 2026/27) to bring those funds into the UK where they will be taxed at 12%. Its a useful tool that gives you the option to bring foreign income/gains from previous tax years into the UK at a much lower tax rate than would have been the case if the remittance basis had stayed intact.
One Year Foreign Income Tax Discount
Another transitional arrangement offers a 50% discount for those who have been using the remittance basis and will not be eligible for the FIG regime (having lived in the UK for more than 4 years). For those individuals they will need to start reporting their foreign income on their UK personal tax return (regardless of whether it is remitted to the UK or not) and it might be a bitter pill to swallow for some. So, this transitional arrangement calculates the tax due on HALF of the foreign income for the 2025/26 tax year giving the taxpayer a year to mentally prepare for a higher tax bill. The reduction is only in place for the first year though, so from 06 April 2026 onwards they’ll be paying the full (normal) rate of tax of all foreign income.
Inheritance Tax changes
Inheritance tax is also a domicile-based system at the moment, and the government intends to move this to a residence-based system also. NOTE: The following is only what has been proposed so far, and none of it is set in stone.
At the moment, if a person is UK domiciled or deemed domiciled, they are liable for inheritance tax (IHT) on their worldwide assets. And if the person is non-UK domiciled, they are liable for IHT only on UK assets (including UK residential property held through foreign entities).
It is anticipated that the new rules will involve charging IHT on worldwide assets if the person has been UK tax resident for 10 years or more. Furthermore, if the person leaves the UK, then they’re also liable for IHT in the UK on worldwide assets for a further 10 years. Ouch! Like I say, these rules are not yet set in stone, and keep an eye on the outcome of the next UK general election, but you get the idea of where things are headed. One item up for discussion is how property held in trust will be accounted for – it’s a moving target at the moment.
Avoiding the New Zealand Nightmare Scenario
Having two owners that come for New Zealand, we’re acutely aware of how the UK and NZ tax rules interact. New Zealand does not have a capital gains tax, and this can really hit some Kiwis hard when they move to the UK. The situation becomes a problem when a New Zealander moves to the UK, keeping assets back in New Zealand that they might potentially sell at some point in the future. Residential real estate for example can be a huge issue.
Let me give you a simplified example to illustrate. Say Rodney was born and raised in New Zealand, and bought a 3-bedroom house in Warkworth, NZ, 10 years ago. Rodney never lived in the property as it was always rented out. Over the past 10 years the property has gone up in value by $500,000. Rodney moves to the UK in May 2025 (having previously lived there from 2018 to 2020) and intends to stay there for a few years. He gets a job that pays £65,000 per year and he likes it so much he decides to buy property in the UK. To fund the purchase, he sells his house in Warkworth in July 2025. He is not eligible for the FIG regime, and so the full capital gain of the property becomes taxable in the UK at 24%, so he loses NZD120,000 to the UK tax office. If Rodney had sold the property just before arriving in the UK, his capital gains tax bill would have been $0 instead.
The non-dom tax rule changes make it very easy to make a very expensive mistake when moving to the UK from a country that does not have a capital gains tax. At the moment our most simplistic advice is, (a) if you are a kiwi living in New Zealand and looking to move to the UK, and (b) you are sitting on some assets in New Zealand that gone up in value since you purchased them, and (c) you think you might sell the assets at some point in the future while you are still living overseas => then sell the assets before you move to the UK and pay no capital gains tax either in the UK or NZ.
Summary
As we stand at the crossroads of change, the impending tax rule revisions beckon a new era for non-doms and the UK’s tax system alike. It is essential for individuals to understand the current benefits and prepare for the upcoming shifts, seeking guidance to ensure they remain on the right side of compliance. Let this be the catalyst for proactive planning, for in the world of taxation, forewarned is forearmed.
At No Worries Accounting we have been helping clients navigate these tricky issues for years, so you have any concerns or questions feel free to get in touch.
Frequently Asked Questions
What exactly is non-dom status?
Non-dom status applies to UK residents with a permanent domicile outside the UK and affects how they are taxed on foreign income and gains. This means that if you are a UK resident but have a permanent home (or ‘homeland’) elsewhere, you may be eligible for non-dom status.
How does the remittance basis work for non-doms?
The remittance basis for non-doms entails paying UK tax solely on the income and gains brought into the UK, potentially exempting foreign earnings from UK tax. There are hooks with this though including the potential loss of your UK personal allowance, and paying the HMRC a remittance basis charge starting from £30,000 per year.
What major changes are happening to non-dom rules in 2025?
Starting in April 2025, the non-dom regime will be replaced with the FIG regime, which prioritises UK residence for tax purposes and eliminates the remittance basis and domicile concept. These changes mark a significant shift in the tax landscape for non-doms.
Will new arrivals to the UK be affected by the changes in non-dom rules?
Yes, new arrivals to the UK from April 2025 will not be taxed on non-UK source income or gains for up to four tax years, which is beneficial for them. However, they would also lose their personal allowances, so its not a one-size-fits-all.