Non-domicile (non-dom) status in British tax law originated over 200 years ago during colonial times. The UK tax system has included domicile rules since 1914, with additional restrictions introduced that year.
Over time, the non-dom rules have evolved significantly, reflecting their importance in the current tax framework and the ongoing discussions about potential reforms.
Despite changes, non-dom status plays a significant role in the UK’s international tax framework.
Non-doms are residents in the UK but claim that their domicile, which is the centre of their personal and financial interests, is outside the UK. This non dom tax status impacts their tax obligations, including reporting requirements and tax planning opportunities.
Domicile is an important concept that can impact how individuals are subject to income tax, capital gains tax (CGT), and inheritance tax (IHT) in the UK. Non-domicile (non-dom) status has also offered protection from Inheritance Tax on their non-UK-sited assets. The rules have been adjusted and modified on numerous occasions, with the last big changes occurring in 2017, when a 15-year ‘cap’ was introduced, limiting the number of years a non-dom could benefit under the rules.
According to the latest figures from HM Revenue and Customs (HMRC), external, 68,800 people claimed non-dom status in 2022.
This is a slight increase from the previous year, but overall, there has been a downward trend since the 2017 rule change.
A study of people who were non-doms in 2018 or who had claimed non-dom status since 1997 found that:
Domicile is not defined by statute and is a concept of common law. Every individual has a domicile. Unlike residence, it is impossible to be domiciled in two countries or not have a domicile.
It is important to distinguish between being a ‘tax resident’ and having a domicile. A tax resident meets the criteria set by the UK tax regime for tax purposes, which can affect their income and tax liabilities differently from their domicile status.
There are two main ways that domicile is determined:
Domicile of origin – this is either the country you were born in or if your father came from a different country, your father’s domicile.
As long as you can sustain an argument that your natural and permanent home remains with your domicile of origin, and you intend to return to your home country at some point ‘for the rest of your days’, you should retain your domicile regardless of whether you move to a different country.
Domicile of choice – if you are over 16 and choose to leave your domicile of origin and live indefinitely in another country, you can acquire a new domicile of choice in that new country. This overrides your domicile of origin.
In general terms, if an individual with a UK domicile of origin wishes to acquire a new domicile of choice outside the UK, they must either:
Determining an individual’s domicile is not necessarily straightforward, but where an individual was born abroad, has parents who lived abroad, or has lived abroad for a long period of time, it can be worth investigating to determine their domicile status and how this may impact their tax position in the UK.
Non-UK individuals can be deemed domiciled in the UK for tax purposes if they meet the conditions of being a UK tax resident. This does not change the individual’s domicile under common law but rather their tax status in the UK. Anyone with ‘deemed domicile’ status will be taxed like an individual who is UK domiciled.
Non-doms will be deemed domiciled for income tax, CGT and IHT purposes if they have been UK resident for tax purposes for 15 out of the last 20 tax years.
For income tax and CGT purposes, the deemed domicile status can be broken by a period of non-UK residence. The individual must have been a non-UK resident for 6 complete tax years.
For IHT purposes, the deemed domicile status ceases once the individual has been a non-UK resident for 4 complete tax years.
Non-doms can claim the remittance basis free of an additional tax charge for the first 7 years of UK residence.
Long-term UK residents who wish to continue claiming the remittance basis charge (RBC) are subject to an annual remittance basis charge (RBC) payable via the self-assessment tax system.
Non-doms who have been UK residents for at least 7 of the previous 9 tax years immediately before the relevant tax year will pay an annual RBC of £30,000.
Non-doms who have been UK residents for at least 12 of the previous 14 tax years immediately before the relevant tax year will pay an annual RBC of £60,000.
Therefore, the suitability of claiming the remittance basis will depend on the level of foreign income, associated tax liability in the UK and how this compares to the relevant RBC.
A simple yet effective tax planning opportunity would be to ensure a couple’s foreign income and any gains accrue to only one, thus ensuring only one annual charge arises.
The UK chancellor announced the phase-out of the non-dom tax regime in the March 2024 Budget.
From April 2025, people who move to the UK will not have to pay tax on money they earn overseas for the first four years.
After that period, if they continue to live in the UK, they will pay UK tax on their income just like everyone else.
People currently in nom-dom status will be allowed a two-year transition period, during which they will be encouraged to bring their foreign wealth into the UK system.
From 6 April 2025, the current remittance basis regime will be replaced with a new residence-based test. The new regime will be available for up to four years starting from 6 April 2025, or the first tax year in which the individual becomes UK resident if later.
During these four years, new arrivals to the UK will not be subject to tax on their FIG or on distributions from non-resident trusts. These can be brought into the UK freely without attracting a tax charge. Those opting into the four-year FIG regime will lose their entitlement to personal allowances and annual exempt amounts for CGT.
This new regime will only be available to individuals who have been non-UK residents for at least the previous ten tax years. Still, qualifying individuals who have been tax residents in the UK for less than four tax years by 6 April 2025 will be able to use the FIG regime for any remainder of the four-year term. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents.
For those who currently hold non-dom status and move from the remittance basis to the arising basis on 6 April 2025 and do not qualify for the four-year FIG regime, special rules will apply for 2025/26. That year, they will be taxed on 50% of their foreign income. From 2026/27, foreign income will be taxed normally.
For 2025/26 and 2026/27 only, a reduced rate (of 12%) will apply to remittances of pre-6 April 2025 personal FIG. This does not apply to foreign income arising within offshore trust structures.
From 6 April 2027, pre-6 April 2025, FIG remittances will be taxed at the normal rates. A Capital Gains Tax rebasing of non-UK sited assets (held on 5 April 2019) will be available to those who have historically claimed the remittance basis and remain neither UK domiciled nor deemed domiciled by 5 April 2025. The conditions of this have yet to be published, although the Business Investment Relief will remain available.
From 6 April 2025, the protection from taxation on income and gains within settlor-interested trust structures will be removed for those who do not qualify for the four-year FIG regime. Instead, FIG arising in such settlements will be taxed on the UK resident settlor/transferor on an arising basis. FIG arising pre-6 April 2025 will continue to be matched on a worldwide distribution basis.
Overseas workday relief for the first three years of residence will remain, but it will be based on whether the individual opts to use the new four-year FIG regime.
There is an intention to move away from a domicile-based system to a residence-based system for inheritance tax from 6 April 2025, which will impact UK inheritance tax for non-doms. There will be a consultation period before this. While nothing has been confirmed, it is envisaged that IHT will be charged to individuals who have been UK residents for ten years to keep individuals within the scope of IHT for ten years after leaving the UK. As is the case now, UK-sited assets will always remain within the IHT scope.
Non-UK assets held by non-UK trusts which benefit from ‘excluded property’ status are currently expected to remain outside the scope of IHT.
IMEs can elect into the FIG regime year-by-year but will lose their personal allowance and annual exemption (Capital gains tax).
If an individual leaves the UK temporarily during the four-year period, they can make a claim under the four-year FIG regime for any qualifying tax years remaining on their return to the UK. However, this will not apply to anyone resident in the 2023/24 UK tax year and returns to establish UK tax residency from 6 April 2025 or later unless they have been non-resident in the UK for ten UK tax years before they return to the UK.
Individuals who opt for the FIG regime will lose their annual exemption for capital gains tax purposes (currently £6,000) and their personal allowance (PA, currently £12,570). This is also the case under the current remittance basis rules, and IMEs earnings over £100,000 are already subject to the gradual reduction of the PA to nil once their earnings reach £125,140.
IMEs arriving in the UK from 6 April 2025 who haven’t been resident outside the UK for at least ten UK tax years will no longer be eligible for overseas workday relief nor the wider benefits of the FIG regime. Currently, OWR is only restricted to non-doms who have been non-residents for three UK tax years before arriving in the UK.
We envisage no significant adverse impact on IMEs’ employers. We expect HMRC to allow applications for section 690 directions or a new equivalent so employers can operate PAYE on a reduced percentage of earnings for IMEs eligible for OWR.
Due to OWR’s three-tax-year availability, we expect no increased UK tax burden for employers of tax equalised or partially tax-protected IMEs. In fact, the employer tax burden may decrease due to the removal of the restriction on bringing foreign earnings to the UK.
Employers should revisit their global mobility tax policy given the potential attractiveness to IMEs of remitting previously unremitted (and untaxed) earnings due to the reduced 12% tax rate in the transition period. This timing will be particularly relevant to US-taxable IMEs due to how foreign tax credit is claimed for US tax purposes.
These are significant proposed changes (and alternative proposals) to the tax regime for non-doms. Although the regime has been suggested to have been simplified, the rules will still produce a variety of scenarios with several layers of complexity. The transitional provisions (if introduced) provide time for some individuals to arrange their affairs before the new rules take effect.
While much still needs to be established, we recommend that all current non-doms consider their position without delay, regardless of how long they have lived in the UK.
While it’s not a tax haven, Estonia’s tax code has topped the Tax Competitiveness Index for nine years. This is thanks to the transparent, innovative digital services in place for taxation. Estonia also has no corporate tax paid on reinvested profits. This means that corporate profits are not taxed until they are distributed as dividends, capital reductions, share buybacks, or other expenses and payments that do not have a business purpose.
For distributed profits, the standard rate is 20% or 14% if dividend distributions are made regularly for three years or more. Estonia has signed 62 double taxation agreements.
Hmm, not quite.
The first thing to know is that the e-Residency programme offered in Estonia is neither a substitute for a tax residence nor does it grant a right to physically reside in Estonia.
This means that the e-Residence in Estonia, as well as the e-Residence card, simply allows the ‘e-Resident’ to take ‘advantage’ of digital services publicly available in Estonia, such as cost- and time-effective company formation and online accounting services.
Nonetheless, the e-Residency-Card and e-Residence do not mean that you are permitted to live in Estonia, are exclusively subject to taxation in Estonia or even have a tax residence in Estonia.
By all means, speak with us; maybe there is a solution our business advisors can provide.