Residence regime replaces Domicile: Who will be the Winners and Losers?

Some would say that Rachel Reeves simply copied the Conservative Spring budget, which included their surprise proposal to abolish Tax Domicile, whilst others would say the Conservatives copied Labour’s plans. Either way, the Autumn Statement delivered by Ms Reeves, finally confirmed the following about the Residence Regime and Domicile changes:

• From 6 April 2025, the current rules for the taxation of non-UK domiciled individuals will end.
• It will instead be replaced by a system based purely on tax residence.
• All UK residents will be taxed on worldwide income and gains as they arise.

New Foreign Income and Gains regime

• There will be a new Foreign Income and Gains (FIG) regime, available to individuals for their first 4 years of UK tax residence, but only where they were non UK tax resident for 10 consecutive years prior to arriving in the UK.
• Individuals who make a formal claim to use the 4 year FIG regime, will not pay UK tax on any FIG arising in those 4 years.
• FIG in that 4 year period can also be freely remitted to the UK, completely free of UK tax. This includes later remittances of FIG receipts (assuming not paid into the UK immediately).
• To access FIG regime, the individual will have to give up their UK personal tax allowance (£12,570) and UK Capital Gains Tax Allowance (£3,000).
• The FIG regime must be formally claimed by annual election via the UK Self-Assessment Tax Return.
• Following the end of the 4-year FIG period, the individual will, like all other UK tax residents, be taxed on their worldwide income and gains in the UK.
• The definition of what constitutes FIG is widely drawn, but there are some exclusions, and so care should be taken to check that particular FIG sources will indeed qualify. For example, foreign employment income, or securities income which is connected to an exchange from UK securities is excluded, similarly UK Chargeable Event Gains from Offshore Life Insurance Bonds (albeit perhaps not surprising given there is a domestic tax exemption which can be applied to gains when the policy has been held by non UK residents).
• Foreign Employment Income will essentially be relieved via a claim for Overseas Workdays Relief (OWR).
  • This previously allowed UK resident, but Non Domiciled individuals to claim exemption on foreign based earnings for the first 3 years of UK residence, provided they did not remit any part of this to the UK.
  • Given Domicile status has been abolished, any claim will now be based on an employee’s residence.
  • If that employee is eligible for the FIG regime, they can make an OWR election which will allow them to claim relief for up to 4 years.
  • The relief will now be restricted to either £300,000 or 30% of qualifying employment income.

Winners – UK ArrivALs

The new FIG rules apply to the first 4 years of UK tax residence. Whilst the exemption is only relevant to income and gains that arise after 6 April 2025, the 4 year ‘clock’ starts when an individual becomes tax resident in the UK. It means that anyone arriving here after 6 April 2022, can potentially claim FIG relief after April 2025.

For those who have spent more than 10 years out of the UK and then choose to move here in 2025/26, they will have a full 4 year window to receive FIG free from UK tax until 5 April 2029. This is a significant opportunity to relocate to the UK and enjoy full tax exemption on overseas income and assets.

Note however, that transferring assets / cash to the UK will increase an individual’s UK estate, which in turn could impact their UK Inheritance Tax exposure, so it is important to consider this factor ahead of making UK remittances, despite them being free from income or capital gains taxes.

OWR claimants can also now remit their qualifying foreign employment income to the UK without any UK tax charge.

Example scenario

Mike, who is originally UK domiciled has lived in Spain for over 15 years, but due to family circumstances, returns to the UK in June 2022. He claims ‘split year’ treatment on his arrival, therefore only resident from June 2022 and not April 2022. His UK tax position would be as follows:

Potential Losers – UK Resident/Non Domiciled

For those Non UK Domiciles (ND) who have been resident in the UK for up to 15 years, there will likely be a detrimental impact on their UK Income and Capital Gains tax exposure.

When considering the impact of the new Residents Regime, NDs should note that:

• If you have been resident in the UK for more than 4 years at 6 April 2025, you will not be able to take advantage of the new FIG regime.
• RB can no longer be claimed.
• From April 2025 you will be taxed on worldwide income and gains, even if not remitted to the UK.

ND’s who have significant overseas income and assets, will inevitably see their UK tax bill  increase. Some may have reached the point of paying the highest remittance basis charge of £60,000 (12 years of residence), but this may still be less than paying UK tax on global sources.

The good news is that Transitional Relief measures will be introduced to help negate the tax impact for affected individuals:

• There will be a Temporary Repatriation Facility (TRF) for those who have claimed RB in prior tax years.
• Subsequent to a formal election, individuals can ‘designate’ amounts derived from previously untaxed and unremitted overseas sources that arose prior to 6 April 2025.
• These designated amounts can then be remitted to the UK and tax will be restricted to the following reduced tax rates:
  • 2025/26 – 12%
  • 2026/27 – 12%
  • 2027/28 – 15%
• Where the TRF charge has been paid, individuals will then have the freedom to choose when in which year to remit the designated amounts to the UK – perhaps in a later tax year
• Capital Gains Tax (CGT) – current and past remittance basis users will, for disposals after 6 April 2025, be entitled to rebase foreign assets for CGT purposes to its market value @ 6 April 2017. In other words, claim the 2017 market value as a cost to set against proceeds rather than the original cost, assuming acquired pre 2017.

Note that whilst Domicile has been abolished for UK tax purposes, it remains relevant under other aspects of UK law, particularly succession laws in terms of directing estates on death.

That said, the new Residence Based tax regime is one of the biggest changes to UK domestic tax law in many decades. The concept of Domicile and application to UK tax exposure has been with us for over 200 years and is deeply embedded throughout existing tax legislation. It affects not just Income and Capital Gains tax, but directly impacts family trusts and inheritance tax exposure.

It is important to highlight that the above proposals remain in draft form and there may well be changes made ahead of final legislation. Given the complexities associated with these changes, it is important that anyone affected seeks professional, but importantly, bespoke advice, from suitably qualified and experienced agents.

If you have any queries about the new residence regime, or need assistance in navigating the changes, we are here to help. Please do not hesitate to get in contact with Lynn Gracie or Lyndsey Russell, a member of our Private Client team or your usual AAB advisor.