We look at the key changes proposed for the non-dom regime and overseas workday relief for expats.
As part of the Spring Budget, Jeremy Hunt announced the abolition of the non-dom regime and significant reform of the current rules. So how would this affect expat individuals in the UK? With an election now on the table there is no guarantee in a general election year that the proposed changes will go ahead, both the Conservative and Labour parties have plans to abolish the non-dom regime.
What are the current rules?
- Non-domiciled individuals can claim the remittance basis of taxation for their first 15 years out of 20 in the UK. This allows them to keep foreign income not remitted to the UK outside of the UK tax net
- Non-domiciled, inbound expat individuals are also eligible to claim overseas workday relief (OWR) in the first three tax years after they become a resident, if they claim the remittance basis
- Once OWR is claimed, income related to overseas workdays is not taxable in the UK if it is paid into an offshore bank account and kept overseas
- If the income related to overseas workdays is later remitted to the UK, it will be subject to UK tax at the marginal rate
- Special mixed fund rules apply if the employment income is paid into a ‘qualifying’ bank account, simplifying the usual, complex rules for mixed funds
- Individuals are not be eligible for the tax-free personal allowance or annual exemption for capital gains if the remittance basis is claimed and the unremitted overseas income exceeds £2,000 in the tax year.
Currently, in order to benefit from the OWR, UK inbound expat individuals have to carefully structure their bank accounts and avoid remitting income related to foreign workdays to the UK to maximise the relief.
What are the proposed new rules?
From 6 April 2025, the remittance basis would be abolished and replaced with a residence-based test. Under the new test, those who have been non-resident continuously for 10 tax years before moving to the UK would be treated as follows:
- they could claim the foreign income and gains (FIG) regime for the first four tax years of UK residency. Under the FIG:
- foreign income and gains would be exempt from UK tax, even if brought to the UK
- they would not be eligible to the personal allowance or annual exemption for capital gains
- FIG would not apply to income related to overseas workdays, which would continue to be subject to OWR
- from the fifth tax year onwards, they would be taxed on worldwide income and gains.
Under the new rules, OWR would only be available if the FIG regime is claimed. It would continue to apply for the first three tax years of UK residence, and income related to overseas workdays could be brought to the UK.
Easier for companies
Under the current Government’s proposals, from 6 April 2025 UK inbound expat individuals would no longer need to worry about complex bank account structuring for their employment income. Employers could simply pay their full employment earnings into a UK bank account. For the first three tax years, OWR could be claimed in full as long as the FIG regime is used, simplifying the administrative burden on both the company and the individual.
Please note that in the fourth year, although the individual could still claim the FIG and receive tax relief on their personal foreign income and gains, there would be no relief available on foreign workday income. Instead, foreign tax paid on income related to foreign workdays could be claimed as a credit against the UK tax to avoid double taxation.
What would happen during transition?
The Government has also proposed some transitional rules. How would they work?
- There would be a ‘temporary repatriation facility’ available for tax years 2025/26 and 2026/27. This means individuals could elect to pay UK tax at a reduced rate of 12% on remittances of pre-6 April 2025 foreign income and gains, including income previously subjected to OWR claims
- After 5 April 2027, previous unremitted foreign income would be taxable in the UK at the point of remittance
- In the 2025/26 tax year, those not eligible for the FIG would be taxed in the UK on 50% of their personal foreign income arising in the year. Foreign capital gains are not eligible for the reduction. So far there is no clear guidance on whether income related to foreign workdays would be covered by this rule. But since OWR is limited to the first three tax years, we don’t expect foreign workday income to qualify for the relief
- There would be an option to use the value of foreign assets on 5 April 2019 as the base cost for capital gain purposes, instead of the actual cost, if the remittance basis has been claimed previously.
Based on current rules, remitted employment income related to foreign workdays would be taxed at the individual’s marginal rate up to 45%. Under the transitional rules, if they needed to transfer money to the UK, for example to buy a UK home, there may be a significant tax saving if they made the transfer using the temporary repatriation facility.
If you have any questions about issues raised in this article, please get in touch with Stephen Kenny.
