In the government’s most recent budget, they announced a major overhaul to the current non-domicile regime, which offers favourable tax treatment to foreign nationals living in the UK. The idea behind the regime is to attract wealthy individuals to come and live in the UK, and importantly, invest in UK industry and commerce. In this article, we summarise the key points of those changes.

Firstly, from the beginning of tax year 2025/26, the remittance basis of taxation will be abolished and replaced by a new four-year foreign income and gains regime. Under this new regime, during the first four years, no tax will be payable on income and gains arising on foreign assets, but UK income and gains will be taxable. Thereafter, worldwide income and gains will be subject to UK tax on an arising basis in the same way ordinary UK residents pay tax. An “arising basis” of taxation means you are taxed on income and gains when they arise. Under the old remittance basis of taxation, non-UK income and gains were only taxed if and when they were brought into, remitted, the UK. The remittance basis of taxation could be claimed for 15 years, but after seven years, a flat fee was also payable.

A transition regime will be introduced for anyone moving from the remittance basis of taxation to the arising basis of taxation who is not eligible for the new four-year regime. Under the transition regime, for tax year 2025/26 only, individuals will pay tax on 50% of their foreign income, but not foreign chargeable gains. Thereafter foreign income will be taxed on an arising basis. Further, as part of the transition regime, an individual who has claimed the remittance basis upon the disposal of an asset prior to 5 April 2019 will be able to elect to “re-base” that asset to its value as at 5 April 2019. “Re-base” means the base cost of an asset will be stated as at 5 April 2019.

Finally, the government announced its intention to open a consultation on the basis upon which an individual’s estate is subject to inheritance tax. Presently, domicile determines an individual’s exposure to inheritance tax. Anyone who is UK-domiciled is subject to UK inheritance tax on their worldwide estate, meaning all of their assets wheresoever situate. As such, individuals who were not born in the UK can attempt to mitigate their exposure to UK inheritance tax by relying on their domicile of origin, which is their father’s country of birth. For example, if a person was born in Pakistan to a Pakistani father, their domicile of origin would be Pakistan. If they held assets in the UK, only those UK assets would be subject to inheritance tax, even if they were living in the UK, and not their assets in other countries. The government wants to move to a residence-based regime for inheritance tax exposure, meaning anyone resident in the UK for 10 years or more will be subject to inheritance tax on their worldwide estate.

The government has sought to radically change the status quo in respect of the taxation of foreign nationals in the UK. Druces’ Private Wealth team are primed to advice on and assist with these changes. Should you require any advice, please contact a member of the Private Wealth team.