On 30 October 2024, Chancelor Rachel Reeves presented the UK budget, which included significant changes to the tax regime for non-domiciled individuals. Specifically, the budget proposed the abolishment of non-domicile status and creation of a new residence-based test known as the Foreign Income and Gains Regime (FIG). As outlined, the new FIG regime will be effective 6 April 2025, greatly impacting the tax situations for individuals moving to or from the UK.
This budget marks a momentous shift in the UK’s approach to taxing non-domiciled individuals. Given the significant changes, it is critical that non-domiciled individuals and their employers understand how the new regime will tax foreign income, gains, and inheritances to allow for appropriate planning to mitigate or plan for any negative impacts.
UK tax treatment of foreign income and gains
Under the current UK rules, individuals considered non-domiciled in the UK can generally claim exemption from UK tax on overseas income and gains for their first seven years of residency, provided these earnings remain outside the UK (i.e., the remittance basis). This exemption can be extended up to 15 years by paying an annual charge. Additionally, global assets may be exempt from UK Inheritance Tax until an individual becomes deemed domiciled, which applies when a non-domiciled individual has been resident in the UK for at least 15 of the past 20 years. The concept of domicile, which dates back over 100 years, may apply if your father’s home was outside the UK at the time of your birth, or even if you leave the UK with no intention of returning.
Under the new budget proposal, a new UK tax exemption will apply to foreign income and gains for the first four tax years of UK tax residency, a reduction from the current seven-year exemption window, with no option to extend. Eligibility for the FIG regime requires that the individual be a non-resident in the UK for at least 10 years before arrival.
Impacts:
- For assignees who arrived in the UK during or after the 2022/23 tax year, they will receive the balance of any remaining four-year exemption period. However, assignees who arrived in or after the 2021/22 tax year will be taxed on worldwide income and gains from 6 April 2025, provided they remain UK tax residents that year.
- Generally, any assignments to the UK intended to last for more than four tax years may be affected. Employers should review and update tax policies to address the potential impacts on personal income and incremental tax costs. Additionally, it will be necessary to inform affected assignees in advance, so they are aware of any additional tax obligations.
For UK tax year 2025/26 onward (6 April 2025 – 5 April 2026), FIG-eligible individuals will also need to report all personal worldwide income and gains on a UK tax return, a significant change from the current process, which requires only the declaration of overseas personal income actually remitted to the UK. This change will increase the time, complexity, and cost of compliance, emphasizing the need for secure and efficient data sharing between global tax providers.
For assignees previously on the remittance basis but ineligible for FIG from 6 April 2025, a rebasing of overseas assets for capital gains tax purposes will be available, based on the market value as of 5 April 2017.
Overseas workday relief
Overseas workday relief (OWR) allows non-domiciled assignees eligible for the remittance basis to claim UK tax exemption on earnings related to workdays performed outside of the UK, as long as at least the claimed amount is paid and kept outside of the UK. This relief currently applies for the first three years of UK tax residence. Simplified rules are available if an assignee uses a “qualifying overseas account,” defined as one that only receives their salary and had a balance of £10 or less before the first eligible income was deposited.
Effective 6 April 2025, OWR will be extended to the first four years of UK tax residency, and the requirement to keep earnings outside the UK will be removed for this period. Additionally, it will no longer be necessary to apply for reduced tax withholding under Section 690 legislation for UK payroll.
Employers will be able to notify HM Revenue and Customs (HMRC) of their intention to exclude a portion of a qualifying employee’s relevant pay from PAYE, applying only PAYE to UK-based work earnings, under a streamlined application process that replaces the current Section 690 process, which often takes months to authorize.
A new financial cap for claims will also be introduced from 6 April 2025, limited to the lower of £300,000 or 30% of qualifying employment income per tax year.
Impacts:
The changes offer some positive impacts for assignees moving to the UK. Extending OWR by an additional year will be welcomed by employers with tax equalization policies, as it reduces assignment costs for assignments over three years. Removing the requirement to retain a certain part of the salary outside the UK will allow more assignees to claim relief without the current restrictions, such as where they cannot afford to keep the required proportion of salary outside of the UK. They will also benefit from reduced tax withholding in monthly payroll, rather than waiting to reconcile this on their UK tax return after year-end.
The shift to a “process now, check later” approach for PAYE income exclusions in place of current Section 690 applications will streamline authorization, enabling HMRC to quickly approve PAYE adjustments based on the anticipated percentage of UK workdays.
A complexity arises with trailing income relating to the 2024/25 tax year (or earlier) that is received in 2025/26. Such income will still need to be paid into a qualifying overseas account to benefit from OWR and will remain under the old remittance basis rules. Since only earnings from 6 April 2025 onwards will fall under the new FIG regime, earnings may still need to be deposited into a qualifying overseas account until any relevant trailing income has been received.
One drawback of the changes is the introduction of a financial cap, which previously did not limit annual claims.
Inheritance Tax
In the UK, Inheritance Tax (IHT) is charged on the estate at death, with a tax-free allowance of £325,000 and a 40% tax rate applied to amounts above this threshold. Certain exemptions, such as those for inter-spouse transfers, and additional allowances for residential property can increase the tax-free threshold to £1 million in some cases.
Starting 6 April 2025, non-UK assets will fall within the scope of IHT if an individual has been a UK resident for at least 10 out of the 20 years preceding a chargeable event (such as death).
For individuals who have been UK residents for between 10 and 13 years, this IHT liability will apply for three tax years following their exit from the UK. The liability period then extends by an additional year for each year of residency. For example, if an individual was resident in the UK for 15 out of 20 tax years before departing, they would remain in scope for five years, while someone with 17 years of residency in the same period would remain in scope for seven tax years. Once an individual has been non-resident for 10 consecutive years, the IHT residency count resets.
Impacts:
These changes are likely to affect permanent transfers more than temporary assignees. However overseas employees who relocated to the UK and were deemed non-domiciled may now have overseas assets subject to IHT if they have been UK tax resident for 10 or more years before 6 April 2025. Previously, non-domiciled individuals could maintain IHT exemption on overseas assets for up to 15 years.
On a positive note, individuals who permanently transferred from the UK to an overseas location who have maintained non-UK residency for 10 or more years will not be liable for IHT on non-UK assets after 6 April 2025.
It’s important to note that UK-based assets will remain within the scope of IHT regardless of the individual’s time spent in or out of the UK.
Temporary Repatriation Facility
The Temporary Repatriation Facility (TRF) offers an opportunity for those who previously claimed non-domicile status and used the remittance basis to bring overseas income and gains to the UK at a reduced tax rate for a three-year period starting in the 2025/26 tax year.
The TRF’s reduced tax rates are set at 12% for the 2025/26 and 2026/27 tax years, increasing to 15% in the 2027/28 tax year.
Impacts:
The TRF introduces a significant planning opportunity for assignees who have maintained overseas income and gains offshore (including income exempt under the Overseas Workday Relief) to repatriate these funds to the UK starting 6 April 2025 at a much lower tax rate than currently applicable.
This facility can benefit assignees who have localized in the UK but were previously discouraged from remitting income due to tax implications. Employers will need to review tax policies accordingly, as localized assignees may now wish to transfer previously exempt income, potentially covered under tax equalization arrangements. This may involve policy adjustments to determine if TRF tax liabilities fall within the scope of tax equalization and considerations for UK tax charges in 2025/26 that relate to prior years. It will also be essential to assess whether such remittances may be eligible for foreign tax credit claims in the Home country, especially relevant for US-to-UK assignments.
Additionally, employers and assignees must consider the potential implications of incurring a UK tax charge on income and gains remitted under the TRF years after they arose, as the overseas country may have already fully taxed this income with no possibility of adjustment.
The upcoming changes to the UK’s tax rules under the FIG regime and associated reforms are incredibly complex and represent a significant shift for individuals moving to or from the UK. Employers and global mobility managers will need to carefully assess these changes, update tax policies, and implement strategies to manage the impact on assignees. However, with careful preparation and proactive communication, companies can help ensure a smooth transition, mitigating unexpected tax costs and supporting a positive experience for mobile employees.
A full Budget analysis with details of all other changes arising and our tax rate tables can be viewed here.
