Farewell domicile – what’s next for globally mobile employees?

Much of the announcement has been well trailed and follows the initial proposals from her predecessor, Jeremy Hunt. However, there are some adjustments with significant implications for individuals previously subject to the domicile regime. We summarise the developments and their potential impact on internationally mobile workers below.

Foreign Income and Gains

The proposals were only mentioned briefly in the Budget speech itself and it was in the technical papers and draft legislation subsequently released by the Government that put the meat on the bone.

Beginning 6 April 2025, the new Foreign Income and Gains (FIG) regime will allow for qualifying arrivals in the UK to exclude their FIGs from UK taxation for the first four years of tax residence, regardless of their domicile and whether they remit the relevant income to the UK, albeit with increased reporting requirements. ‘Qualifying new residents’ are those eligible for the FIG regime, and must have been UK tax non-resident for the ten tax years preceding their year of arrival (with split years counting as a year of residence).

The new system has many attractive attributes, not least that it removes the onerous and counter-productive requirement to retain such income outside of the UK and track transfers of funds. There's also a greater degree of flexibility in the new system, with qualifying taxpayers able to elect to apply the regime to, for instance, foreign income but not gains, or even to individual FIG sources.

The legislation will also extend to British nationals who have been non-resident for long enough, and the Government chose not to prevent this in the draft legislation released. There are also significant concessions afforded by transitional rules which we will come to later in the article.

However, the ten-year qualifying criteria means anyone previously tax resident in the UK within the past ten years, even if only for their studies, is excluded. For those excluded, worldwide income and gains will be reportable and taxable in the UK; a doubly punitive outcome in the case of Capital Gains, given increases in the tax rates also announced in this Budget, although there may be overseas taxes paid on the foreign income/gains on which double taxation relief can be claimed.

This will undoubtedly discourage some individuals from taking up UK posts, or lead to individuals managing their time in the UK to be considered non-UK tax resident, to mitigate their exposure to UK taxation. Further, the change to a residence-based system for inheritance tax may also prompt some expats to think twice before coming to the UK longer term.

The new reporting requirements are also a concern, as accessing the FIG regime is conditional on full reporting of all FIGs being exempted. In effect, this puts qualifying taxpayers in the position of having to gather and report details of all their foreign investments as if filing on the old arising basis of taxation, even if such income sources are not ultimately subject to taxation.

At present, there is no de minimis proposed for reporting, so every last penny needs to be accounted for, it will be interesting to see as the new legislation passes through Parliament whether there is any relaxation introduced in this area.

Foreign Employment Relief

In an encouraging improvement on original proposals, the Chancellor has aligned Overseas Workday Relief (OWR) to the four-year length of the new FIG regime. The relief has also been rebranded in the draft legislation: it is now Foreign Employment Relief (FER).

As with FIG, taxpayers no longer need to worry about where their foreign earnings are paid and retained; FER is available on qualifying earnings even if paid into a UK bank account. There are, however, some significant caveats.

Most notably and in sharp contrast to OWR, FER is subject to a cap. Relief may only be claimed for up to the lower of £300,000 or 30% of ‘net qualifying earnings’, a restriction which will have a significant impact on the value of relief for higher paid individuals and those with more than 30% overseas workdays.

Care will also need to be taken with income received in one tax year which is deemed to be in relation to duties carried out in a previous year (‘trailing income’), as this will be subject to the previous year’s cap. If FER was claimed to the fullest extent in the earlier year then no relief will be available for the later trailing payment. In addition, trailing income received in relation to a period before 6 April 2025 will still be subject to the old remittance rules, requiring it to be received and retained offshore to qualify for OWR; more below on this.

A FER claim must be made before the end of the period of 12 months beginning with 31 January after the end of that tax year, for example by 31 January 2028 for 2025/26. Qualifying individuals will need to ensure they make their claims in time.

Eligibility for FER is also tied to qualifying for FIG, another potential blow for individuals arriving in the UK from 6 April 2025 who have been resident in the UK for any year in the ten leading up to their arrival. The relief is to be calculated on a ‘just and reasonable’ basis, clarified in the technical paper as normally where duties have been carried out, i.e. workdays. This maintains the status quo, although fails to make UK-based roles ( e.g. domestic infrastructure projects) more attractive to foreign talent.

In summary, while FER represents a welcome move in removing the current requirement to retain funds offshore and extending the relief to four years, arguably it is a missed opportunity to broaden incentives for foreign talent and bring our tax relief regime closer to that of some of our neighbouring countries.

Transitional Rules

Transitional rules for individuals caught between the two systems of taxation have been confirmed.

From 6 April 2025, a new ‘Temporary Repatriation Facility’ (TRF) will be introduced to encourage individuals to remit to the UK their FIG which arose in earlier periods but were not taxed in the UK under the remittance basis.​ This facility is similar to that proposed by the Conservatives, except for some important amendments.

The good news for affected individuals is that the TRF will be available for three tax years from 6 April 2025, not the originally proposed two years. ​Broadly, amounts nominated (‘designated’ in the rules) will be charged to tax at a rate of 12% in tax years 2025/26 and 2026/27, with the rate now rising to 15% in tax year 2027/28.​ The TRF charge will arise and be payable in the year you designate the income/gains, but there is no requirement for amounts to be physically remitted during that year.​

Transitional provisions have also been drawn up for FER/OWR:

Where employees arrived in the UK and claimed OWR in a tax year prior to 6 April 2025 and are ineligible for the new 4-year FIG regime, they will still be eligible for OWR for their first three years of UK tax residence. ​
Employees that are part way through their three-year claim at 6 April 2025 and are eligible for the four-year FIG regime, can benefit from FER for a total of four years of UK residence, without the new cap applying. ​This is unexpectedly generous and should be welcomed by individuals who feared uncertainty in their position with the coming changes.
There is additional complexity in the treatment of trailing income relating to duties carried out before 6 April 2025. Where trailing income relates to the period before 6 April 2025 but is received afterwards, it will be treated under the pre-6 April 2025 OWR rules. ​This means any trailing income relating to the pre-6 April 2025 period will still need to be paid into a qualifying overseas bank account and kept offshore to benefit from OWR.​

It's notable that the keenly anticipated move away from relief being dependent on location of relevant funds has not been made cleaner, but as this is a transitional measure it should be an increasingly rare concern as time passes.

UK tax treatment of flights costs

The reform also addresses other areas of legislation reliant on domicile, including the taxation of flights (often referred to as “Home Leave”).

The Finance Bill published on 7 November 2024 notably included a change from the draft legislation issued on Budget day regarding eligible individuals for Home Leave. 

It is now proposed that effective 6 April 2025, individuals who are “non-resident” or “qualifying new resident” will be eligible for Home Leave. The original draft legislation included only “qualifying new resident” individuals meeting the criteria for the FIG regime.

This is a welcome update for those individuals who are non-UK resident, including overseas based directors of UK companies, where the UK is considered a permanent workplace.

Payroll administration simplified

An administrative change from 6 April 2025 which may bring a sigh of relief from many employers and tax advisers alike is the introduction of a “process now, check later” approach to “Section 690 Directions”.

A Section 690 enables an employer to operate PAYE on only a best estimate of income relating to UK duties, for non-UK-residents or residents where FER / OWR applies. Currently employers must wait for HMRC approval before implementing this, which is creating long delays and cash flow disadvantages.

From 6 April 2025, once they have applied and received auto-acknowledgment, employers can begin applying the PAYE relaxation straight away, although it is worth noting that HMRC could respond to override the employer’s self-reported percentage.

Conclusion

Now that we have the detail, the focus for employers should be on understanding the impact of the new regime and additional complexities on their employees and policies. With the April 2025 implementation date confirmed, it is important that employers and employees act quickly to prepare themselves.

For further help or to assist you with the transition to the new taxation regime, get in touch with Heather Smallwood.