Following the Spring Budget HMRC had started holding ‘listening sessions’, at which advisors and other stakeholders could ask questions and make suggestions on the proposals. However, only a few were held before the Prime Minister announced a General Election on 4 July. The reforms were not included in the pre-dissolution Finance Bill leaving some ambiguity as to how and when the reforms will eventually be implemented.
While the details are still unclear, it is almost certain that reform of some description will go ahead, with Labour also proposing to close certain perceived loopholes under the Conservative proposals along with other reforms they would consider.
The tax advantages of non-domicile status can be significant in UK income tax, capital gains, and inheritance tax. Non-domiciled individuals can access the 'remittance basis of taxation' for up to 15 years and exclude non-UK income and gains from UK taxation, subject to specific conditions. This has been attractive to international workers and high net worth (HNW) individuals in the UK.
The remittance basis also includes Overseas Workday Relief (OWR), reducing UK tax on employment income for up to three years from arrival, and potentially reducing the tax cost of assignments to their employers.
However, the criteria for this basis of taxation have evolved over time, with the introduction of annual levies and the cessation of the regime after 15 years of residence. One consistent condition is that income/gains can only be exempted from UK tax if it is received and retained outside of the UK. Consequently, non-domiciled individuals are discouraged from bringing funds into the UK for spending and investment.
The rules on when a remittance takes place and how much is taxable have become increasingly complex and burdensome, requiring taxpayers to meticulously track fund sources and segregate their funds to prevent accidental taxable remittances.
The headline change is the abolition of the remittance basis of taxation and its replacement by a simpler residence-based system from 6 April 2025, referred to as the 'Foreign Income and Gains’ (FIG) regime. Anyone arriving in the UK – regardless of their domicile status under the old regime – may opt to exclude their foreign income and gains from UK taxation for the first four years of UK tax residence, regardless of whether they remit this income to the UK. Individuals will be able to elect the FIG regime on an annual basis. In the fifth year, they revert to being taxed on their worldwide income and gains.
However, this option is only available to individuals who have been UK non-resident for the ten tax years prior to them establishing residence. For longer-term residents, the option to exclude foreign income and gains from UK tax will no longer be available from the fifth year of UK tax residence. This is considerably shorter than the previous regime, where a non-dom could utilise the remittance basis of taxation for potentially 15 years of tax residence (though they might incur charges for doing so).
Transitional provisions have been announced to support those who will lose eligibility to the remittance basis on 6 April 2025.
It should be noted that the eligibility criteria and mechanics of all these transitional rules are to follow. Also, it is unclear whether the definition of foreign income for the purposes of the transitional rules will extend to foreign employment earnings that were previously excluded from UK taxation under the remittance basis.
Reform of the non-dom tax regime had been a Labour party proposal for some time, so it is no surprise they support the broad thrust of the proposals. However, they argue that the Conservative proposals leave a number of loopholes for tax avoidance, namely around the 50% discount in 2025/26 and the potential for shielding FIGs in offshore trusts. Labour proposes to include all foreign assets held in trust within the scope of inheritance tax and removing the 50% discount.
In addition, Labour have expressed concern that the transitional two-year window still disincentivises bringing FIGs into the UK, while the four-year FIG window potentially discourages investment in UK assets. No concrete counter-proposals have been made other than the suggestion that UK investment income may be received tax-free during the four-year window.
OWR, which provides a valuable short-term tax relief for employees moving to the UK, has been retained and its operation will be simplified. Eligible employees will still benefit from OWR on work duties conducted outside of the UK for the first three years of UK tax residence. Many countries have some form of expatriate tax concession for those moving for work and it is important that the UK remains attractive in the global economy.
The most welcome development is that this relief is no longer conditional on keeping the income/gains outside of the UK, which simplifies eligibility for the relief and removes the disincentive to bring FIGs into the UK for spending and investment here.
Some transitional rules are expected for those who have not yet received their full period of OWR under the old rules. However, there will be some who miss out, as the required period of non-residence before OWR can be applied is being increased from four years to ten.
Questions remain around how exactly the new OWR scheme will work, however efforts to simplify the mechanism for accessing OWR are welcome.
When comparing the updated scheme to those available in other countries, there is concern that the opportunity for a more radical shake-up will be missed. For example, the proposals continue to calculate the amount of relief in relation to the proportion of work carried out overseas and the three-year period is short in comparison. Other countries such as the Netherlands and Ireland instead take the simpler approach of providing a (capped) flat relief, regardless of working location. Some offset the cost with an annual fee. It is to be hoped that post-election consultations will afford an opportunity to explore further the merits of the other schemes available internationally.
The proposed changes to the taxation of non-domiciled individuals look certain to proceed in one form or another, even with a potential change in government. Questions remain, however on whether HMRC, taxpayers and employers will be ready for the target date of 6 April 2025 and on the level of consultation which will be possible.
Many will welcome the simplifications arising from scrapping the remittance basis of taxation, however individuals and their employers will need support handling these changes and navigating the transitional periods.
Please contact Katy Bond or Matthew Wilson if you would like to know more.
