In a significant overhaul of its tax system, the UK government has announced the abolition of the non-domiciled (non-dom) tax regime, effective from April 6, 2025. This long-standing system, which allowed wealthy foreign residents to pay UK tax only on their UK income, will be replaced with a residence based taxation model.
Under the new system, individuals who become UK tax residents will be subject to UK tax on their worldwide income and gains after a four-year relief period. This reform aims to simplify the tax code and ensure that all residents contribute fairly to the UK's tax revenues.
Abolition of the Non-Dom Tax Regime
The non-dom tax regime, which has been in place for over two centuries, allowed individuals to avoid UK tax on foreign income and gains by claiming non-domiciled status.
This system has faced criticism for enabling tax avoidance among the wealthy. The government's decision to abolish this regime is part of a broader effort to reform the UK's tax system and address concerns about fairness and transparency.
Introduction of the Residence-Based Tax System
Starting April 6, 2025, the UK will implement a residence-based tax system. Under this system, individuals who become UK tax residents will pay UK tax on their worldwide income and gains.
However, new arrivals will benefit from a four-year relief period during which they will not be taxed on foreign income and gains, provided they have not been UK tax residents in the previous 10 years.
Impact on Existing Non-Doms
Existing non-doms who have been UK tax residents for less than four years will be eligible for the new relief until the end of their fourth year of tax residence.
After this period, they will be subject to UK tax on their worldwide income and gains. Transitional arrangements include a 50% reduction in the tax rate on foreign income for the 2025/26 tax year and the ability to rebase foreign assets to their value on April 5, 2017, for capital gains tax purposes.
Reforms to Inheritance Tax
The government is also reforming the inheritance tax system. Under the new rules, non-UK assets will be within the scope of UK inheritance tax if the individual has been UK resident for at least 10 out of the last 20 tax years.
This change aims to ensure that individuals who have significant ties to the UK contribute to the country's tax revenues upon their death.
Reactions from the Financial Sector
The abolition of the non-dom tax regime has elicited mixed reactions from the financial sector.
Some industry leaders have expressed concerns that the reform may lead to an exodus of wealthy individuals from the UK, potentially impacting the economy. However, the government maintains that the changes will make the tax system fairer and more transparent.
Implementation Timeline and Next Steps
The new tax rules will come into effect on April 6, 2025. In the meantime, the government will consult with stakeholders to finalize the details of the implementation.
Individuals affected by the changes are advised to seek professional tax advice to understand how the reforms will impact them.
Fun Fact
The UK's non-domiciled tax status has been a part of the country's tax system since 1799.
Over the years, it has attracted wealthy individuals from around the world, making London one of the most cosmopolitan cities globally.
The upcoming abolition of this regime marks the end of a significant chapter in the UK's tax history.
Conclusion
The UK government has announced the abolition of the non-domiciled tax regime, effective April 6, 2025. This reform introduces a residence-based tax system, aiming to simplify the tax code and ensure fairness. While the changes have sparked debate, they represent a significant shift in the UK's approach to taxation.
Frequently Asked Questions
What is the non-domiciled tax regime?
The non-domiciled tax regime allowed individuals who were residents in the UK but considered their permanent home to be abroad to pay UK tax only on their UK income and gains.
When will the new residence-based tax system take effect?
The new system will come into effect on April 6, 2025.
Who will be affected by the abolition of the non-dom tax regime?
Individuals who have been UK tax residents for less than four years as of April 6, 2025, and those who have been non-UK residents for at least 10 consecutive years before becoming UK tax residents.
Will inheritance tax rules change under the new system?
Yes. Under the new rules, individuals will be subject to UK inheritance tax on their worldwide assets if they’ve been UK resident for at least 10 out of the last 20 tax years. This replaces the current domicile-based test and aligns with the broader move to a residence-based model.
Can individuals still benefit from any foreign income exemptions?
Yes, but only temporarily. New UK tax residents will be eligible for a four-year exemption on foreign income and gains, provided they haven't been UK tax residents in the previous 10 years. After this period, all worldwide income will be subject to UK tax.
