Publish Date
Apr 25, 2024
A&M Tax Advisor Update
This note is relevant for any UK employers who currently employ non-UK domiciled individuals.
The Spring 2024 Budget announced the abolition of non-domiciled status for tax purposes from 6 April 2025, ending a long established and understood tax regime for individuals who come to the UK without the intention of settling here permanently. The Budget announcements will give currently non-UK domiciled individuals living in the UK much to consider, as it will affect their income tax, capital gains tax and inheritance tax position, but as with any change to taxation which affects individuals, employers also need to understand the implications affecting their internationally mobile population and potentially others within their wider workforce.
The simplification of rules concerning what is UK taxable income (and what is foreign income) makes the UK attractive for assignments or local hire employments of up to four years.
Employees from overseas planning to be in the UK for longer periods, or who are already UK tax resident but not considered to be UK-domiciled under the current legislation (and therefore are benefitting from the remittance basis tax regime), may be put off coming to the UK (particularly if this is a return visit), or wish to repatriate to their home country earlier than intended.
To the extent employers have tax equalised their globally mobile population, any increases in UK tax costs in consequence of the new foreign income and gains (FIG) regime are likely to increase the cost to the employer, depending on the arrangements.
Working remotely from the individual’s home country so as not to be caught by the new FIG regime may also become more attractive. This could also have host country tax and permanent establishment implications which will need to be considered ahead of agreeing any offshore remote working arrangements.
Policies may need to be reconsidered where inbound employees are tax equalised on personal income and gains as UK tax will now be due on worldwide income at an earlier stage of an assignment. Remote worker policies should also be reviewed to ensure these are able to address a potential increase in requests for UK employees to be based and work outside of the UK.
As a first practical step, employers should identify which employees are affected by the new FIG regime, including those who are known to be globally mobile (for example, those on secondment), as well as locally hired employees.
Employers should work to understand the impact on those affected by the change, the commercial implications for the business, determine how this might be addressed and then work with internal and/or external stakeholders to implement any changes needed. Employers should ensure that their internal policies (such as global mobility, tax equalisation and remote worker policies) should be updated and communicated internally ahead of the new rules coming into effect.
The FIG regime that will apply from 6 April 2025 should bring welcome simplification for employers where employees come to the UK to live and work in the short term and do not need to return to the UK for anything other than ad hoc business trips or holidays in the future. The UK may become less attractive to employees from outside the UK who need to be in the UK for substantial amounts of time for the medium to long term. It may also present additional costs and considerations to businesses where employees are either tax equalised (where the employer is paying the UK taxes of an assignee working in the UK), or wish to move overseas and work remotely from another jurisdiction.
Ahead of the new rules coming into force from 6 April 2025, now is the time for employers to understand the new regime, including transitional provisions, and review your expatriate policies and procedures particularly where you are tax equalising or tax protecting employees who come to work in the UK. It will also be important to understand whether any key employees hired locally from within the UK may be affected by the change in tax regime and who may now wish to move outside of the UK and in particular how this might be achieved to retain their expertise and how this interacts with any existing international remote working policy.
The UK tax rules for non-domiciled individuals have always been complex as there is not a legislative definition of ‘domicile’ so the reliance has been on case law. The status hinges on long term intentions starting with, for most people, where a person’s father is domiciled.
An individual coming to the UK who is not UK domiciled can claim the remittance basis each tax year with the following impact:
Where an individual has less than £2,000 of annual foreign income / gains, the remittance basis applies automatically with no loss of tax-free allowances. Otherwise, there is a tax cost which is the removal of the UK tax free personal allowance (assuming the individual would otherwise be entitled to it) and removal of the capital gains tax annual exemption, in each year the remittance basis is claimed.
After seven years of UK residence, a £30,000 annual remittance basis charge is payable (£60,000 after 12 years) to continue using the remittance basis. Once someone has been UK tax resident for 15 out of 20 years, they are regarded as ‘deemed domicile’ and the remittance basis no longer applies; they will also be ‘deemed domiciled’ for Inheritance Tax (IHT) purposes.
Travel to and from the UK (including visa fees) for non-domiciled employees can also be exempt from UK income tax if certain conditions are met.
The concept of domicile and non-domicile status will no longer be relevant for UK taxation, and with this change comes the removal of the remittance basis of taxation and any associated UK tax advantage.
From 6 April 2025, the new FIG regime will be available to individuals for the first four tax years after becoming UK tax resident, provided there has been a period of 10 years of non-UK tax residence. Where a claim is made, eligible individuals will not pay income tax on foreign income and gains arising in the first four years of UK tax residence, and will be able to bring (remit) these funds to the UK free from any additional charges.
The FIG regime will need to be claimed in each eligible tax year that the taxpayer would like the regime to apply. If the FIG regime is claimed, there will be no entitlement to the tax-free personal allowance and capital gains tax annual exemption in that tax year. Where a claim is not made in a particular tax year, taxation of income and gains will be on an arising basis (worldwide income).
OWR will still be available to employees in the first three tax years of UK residence, provided they elect to use the FIG regime. A welcome simplification is that there is no longer a requirement to structure overseas bank accounts prior to claiming the relief for the first time, or to keep this income permanently outside the UK.
To date, we have not seen any commentary from His Majesty’s Revenue and Customs (HMRC) on the future treatment of the limited exemptions covering international travel expenses which are currently based on domicile status. Our expectation is that some form of income tax relief will still be available under the new residence-based regime, but we await further details.
As with any significant change in regime, HMRC have set out transitional rules that will apply to non- UK domiciled individuals who are currently claiming the remittance basis:
We have an experienced team of employment tax specialists who can assist with:
Please contact Claire Murray, Nisus Larsen or a member of the A&M UK Tax team for further information.
https://www.alvarezandmarsal.com/insights/new-uk-foreign-income-and-gains-regime
