Replacement Scheme Offers Tax Free Overseas Income to a Wider Group

The UK government has announced changes to the Non-Domiciled tax regime. In recent years, this regime has made the UK one of the most attractive destinations for high-net-worth foreign residents. Non-domiciled residents could legally avoid worldwide taxation and pay tax only on funds remitted to the UK. Any overseas income would remain outside the reach of the UK government.

Anyone without strong UK connections, such as a parent born there, could claim to be non-domiciled. After using the scheme for seven years, an annual fixed charge of £30,000 was payable.

The changes taking effect from 6th April 2025 abolish the non-dom concept entirely and replace it with a new scheme, The Foreign Income and Gains Regime. From next year, taxation of new UK residents will be based on residency, not domicile. This means that it’s also open to UK citizens who have lived outside the country for ten years or more.

New UK residents who want to take advantage of the Foreign Income regime will pay no tax on overseas income for the first four years of residency. There is no fixed charge for anyone opting in. After four years, UK residents will be taxed on all worldwide income.

Existing non-domiciled residents of the UK will be subject to a transition period. They will be taxed on 50% of their overseas income in the tax year ending April 2026.

Starting from 6 April 2025, anyone who previously claimed the remittance basis of taxation can bring their prior income to the UK and be taxed at 12% for two years.

Any foreign asset sales, subject to UK tax after April 2025, can use their 2019 value.

The UK has also introduced changes to how overseas Protected Trusts are taxed in an attempt to tax all income and gains for UK resident settlors.

While these changes are bad for existing UK residents who use the remittance tax basis, they open opportunities for others. New residents now have four years of tax-free overseas income and ample opportunity to use alternative structures to protect their income thereafter. UK citizens get the unexpected bonus of being able to use the new regime when moving back to the UK after ten years overseas.

Many existing high-net-worth non-dom residents are likely to head for the exit, with Ireland, Italy, and Cyprus likely to be major beneficiaries of the exodus.

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