2024 Autumn Budget: Key Changes to Taxation of Foreign Income, Capital Gains, and Domicile Rules
In the 2024 Autumn Budget, Chancellor Rachel Reeves announced several important reforms that will impact the taxation of foreign income, capital gains, and domicile rules. These new measures aim to close perceived loopholes, increase transparency, and expose more international assets to UK tax.
- Reforms to Domicile Rules
Changes to the domicile rules will affect individuals claiming non-domiciled status and those using the remittance basis of taxation. But what did domicile status mean before these changes?
Domicile referred to a person’s permanent home or the country to which they intended to return, even if they were temporarily residing elsewhere. It was a key factor in determining an individual’s tax status, as it influenced whether they were liable to pay UK inheritance tax, income tax, and capital gains tax on their worldwide income and assets. Unlike residence, domicile was generally not determined by where a person lived at a given time but by their long-term connection to a country. The concept of domicile was / is largely misunderstood.
So, how do the new rules affect this?
Domicile Regime Abolished: Non-UK domicile status, available to individuals with overseas connections or a domicile outside the UK, will cease from 6 April 2025. Long-term UK residents who previously claimed the remittance basis will now be assessed under a residence-based regime. These individuals will be required to declare their worldwide income and gains for taxation in the UK, which, until now, may have been outside the scope of UK tax as long as it remained overseas.
- The New Four-Year FIG Regime – Who is Affected?
Under the new regime, qualifying new UK tax residents will not pay tax on most of the income and gains arising overseas during the first four years of UK tax residence. After this period, they will be taxed on all their worldwide income and gains on an arising basis. This applies to individuals who have been non-UK resident for at least the previous 10 years.
Under the FIG regime, there is a requirement to report all Foreign Income and Gains (FIG) although the FIG will not be subject to UK taxation during the four-year period.
- During the Four-Year Period: The FIG regime is more generous than the remittance basis, allowing the movement of remitted funds into the UK without incurring an income or CGT charge. Under the existing remittance basis, any income or gains remitted to the UK would have been subject to UK tax.
- After the Four-Year Period: The rules become much stricter, with all worldwide income and gains being subject to UK tax, even if the funds remain overseas.The previous option to elect for the remittance basis, which allowed non-domiciled individuals to declare overseas income and gains only if remitted to the UK, will no longer be available. The remittance basis charge will also no longer apply.
- Temporary Absence During the Four-Year Period: If a qualifying FIG individual leaves the UK and becomes temporarily non-resident, the four-year period will not be reset. The benefit of the four-year period will be lost and cannot be extended beyond the fourth year of UK residence.To qualify for another FIG period, an individual would need to be non-resident for 10 complete tax years.
- What Are the Consequences of These Changes?
- Increased Transparency for Offshore Assets: As all overseas income will need to be reported (but not taxed in the first four years), HMRC will gain a broader picture of income and gains it can expect to tax once the four years have elapsed. Failure to declare the full FIG position will disqualify a person from the FIG regime, and if discovered, all undeclared FIG will become subject to UK tax, potentially resulting in substantial penalties.
- Higher Charges and Tighter Rules: For affected individuals, the higher charges and stricter rules will make it more costly to remain a UK resident, leading to higher UK tax liabilities. This could prompt non-doms who were already considering leaving the UK to expedite their departure, while others may be reconsidering their long term UK residence position.
- Best Planning Approach to the Changes
- For Those Planning to Become UK Residents: Arriving after 6 April 2025, and as close as possible to the start of a new tax year, will maximise the benefits of the new rules. UK tax residence status is required to claim the FIG regime. A year of residence counts even if resident in the UK under the split year rules, or treaty resident elsewhere.
- For Current UK Residents: Those who arrived on or after 6 April 2022 will benefit from the FIG regime for the first four years of residence. They should track any income and gains already included in an existing remittance basis claim to avoid duplication and consider using the Temporary Repatriation Facility (TRF).
- For Past UK Residents: Individuals who have been non-UK tax residents for at least the last 10 years can return to the UK after April 2025 and benefit from the FIG regime for the first four years of their new residence period.
- Conclusion
In summary, the 2024 Autumn Budget marks a significant shift in the UK’s tax treatment of non-domiciled individuals and the taxation of FIG. While the new domicile and FIG rules aim to increase tax transparency and close existing perceived loopholes, they also introduce complexities that may affect long-term tax planning for UK residents with strong overseas connections. These reforms are likely to prompt both individuals and advisers to reassess strategies for managing UK residence, FIG, and tax liabilities.
As each individual’s position is bespoke to them, if you are concerned about how these changes may affect you, your assets, or your future UK tax position, please reach out to a member of our team. We would be happy to discuss your situation further.