Non-domicile changes – Foreign Income and Gains Regime

In the Spring Budget 2024 Jeremy Hunt announced the abolition of the non-dom tax regime and a new modernised ‘tax holiday’ for individuals moving to the UK.

It is one of the most significant reforms to the non-dom tax regime in our generation. Many affected individuals will now face a dilemma due to the proposed rules, in terms of both their existing structures and ongoing exposure to UK Tax.

The proposals remove the concept of domicile and, from 6 April 2025, replace it with a new Foreign Income and Gains (FIG) regime for the first four years of UK tax residence for those who have been non-resident for 10 years or more. Those in the regime will pay no tax on their FIG, irrespective of whether it is remitted to the UK.

For new arrivers, this represents an improved position. Currently, FIG cannot be enjoyed in the UK without incurring a UK tax charge. However, under the new regime FIG will be able to be freely enjoyed in the UK with no UK tax charge.

Non-domiciled employees, who have recently arrived in the UK and take advantage of the remittance basis, will make a request to be paid into a non-UK bank account, so that they can also take advantage of overseas workday relief. This relief means that tax is not payable in respect of earnings attributed to work done outside the UK, as long as the associated income is not remitted to the UK. The relief is currently available for the tax year of arrival in the UK and the subsequent two tax years.

The proposed new rules introduce a simplification in that overseas workday relief will continue to be available for those in the FIG regime, but there will be no requirement to keep income offshore. This is welcome news when one considers the complexities associated with structuring offshore bank accounts, and determining what income has been remitted to the UK. Many employees who would be entitled to claim overseas workday relief do not do so as a result of these challenges, so employers should ensure that their mobile employees consider keeping a detailed travel calendar in case they wish to claim the relief under the simpler regime.

It is not all good news, however, as some individuals who would be able to claim overseas workday relief under current rules may not be able to do so if they do not meet the 10-year non-residence requirement of the FIG regime, whereas currently one only needs to be non-resident for three years to claim overseas workday relief.

Businesses should prepare for the fact that with a shorter period of advantageous tax treatment provided by the FIG regime, many employees may be willing to spend much less time in the UK than under the current rules, leading to a trend toward much shorter secondments. These tend to be more expensive for employers as employees typically expect more assignment-related benefits (such as housing costs, school fees and relocation costs) to be provided for a short assignment as opposed to a longer transfer to a local contract. The four-year period does not compare favourably to many other jurisdictions, meaning overseas employers may need to offer additional incentives to persuade employees to take up longer-term UK employments compared to other countries.

There remain significant ‘known unknowns’ regarding the detail of the new rules given how many parts of the UK tax code have domicile-based conditions. To give one simple example, currently non-domiciled employees have a five-year period during which their employer does not have to report travel costs in respect of travel between an employee’s home country and the UK on the employee’s P11D as a benefit-in-kind. How these rules, alongside a host of others, will be impacted by the abolition of non-domiciled status is currently unknown.

Consequently, we recommend employers and globally-mobile employees check regularly with their tax advisers on the latest announcements from both the Government and opposition parties on these matters to be best prepared for all possible eventualities.

How we can help

If you would like to discuss the impact of these changes, please get in touch with your usual Blick Rothenberg contact, or one of the team using the form below.