From Domicile to Residency: The UK's Tax Revolution Explained

UK's 200-Year-Old Domicile-Based Tax System Replaced by Residency-Based System: What You Need to Know

This change is poised to have significant implications for UK residents, expats, and foreign investors alike.?

For over two centuries, the UK’s tax system has relied on the domicile-based approach, allowing non-domiciled individuals (non-doms) to benefit from preferential tax treatment. However, starting April 6, 2025, this historic system will be replaced with a residency-based tax system, fundamentally altering how individuals’ worldwide income, gains, and assets are taxed.?

What Has Changed?

Worldwide Income Taxation: Previously, non-doms could limit UK taxation to income and gains arising within the UK or brought into the UK (remittance basis). Under the new rules, residents will be taxed on their worldwide income and gains regardless of their domicile status.

Example 1: Sandesh, a UK resident originally from Australia, earns ￡50,000 annually from a rental property in Sydney. Under the new rules, this income will now be subject to UK tax.

Example 2: Raj, an Indian professional living in the UK, has dividends from shares held in Indian companies. He will now need to report and pay UK taxes on this income.

Relief for New Arrivals: Recognising the challenges for recent immigrants, the system introduces a 4-year tax break for individuals who have not been UK residents for the past 10 years.

During this period: Foreign income and gains will not be taxed even if brought into the UK. Example: Aakinchan, a Spanish entrepreneur who moved to the UK in 2026, earns ￡100,000 annually from her investments in Spain. For four years, she will not have to pay UK tax on this income, even if transferred to the UK.

Inheritance Tax (IHT):

The new system extends UK inheritance tax to global assets, aligning it with the residency-based approach. Previously, non-doms were only subject to IHT on UK-based assets. Now, global assets will be subject to IHT based on residency.

Example 1: Akshitaa, a UK resident, inherits farmland worth ￡500,000 in Canada. This land will now be included in James’s taxable estate for UK inheritance tax purposes.

Example 2: Dhaani, a UK resident originally from China, owns ￡2 million worth of property in Beijing. Her heirs will now have to account for UK inheritance tax on these assets after her passing.

Transitional Provisions: To ease the shift, transitional rules have been introduced:

1. Asset Re-Basing: Non-UK domiciled individuals can rebase foreign assets to their April 5, 2017 value for disposals after April 6, 2025.
2. Example: A foreign investor who purchased a property in India for ￡200,000 in 2010, now worth ￡500,000, will have the gain recalculated using the 2017 value, say ￡400,000, reducing their taxable gain.
3. Temporary Repatriation Facility: Foreign income and gains earned before April 6, 2025, can be remitted to the UK at preferential rates: 12% in 2025/26 and 2026/27. 15% in 2027/28.

Advantages and Disadvantages

Advantages:

1. Equality and Fairness: All residents, irrespective of their domicile status, will now contribute equally to the tax system.
2. Simplified Rules: Tax compliance becomes easier as the distinction between domiciled and non-domiciled individuals is eliminated.
3. Increased Revenue: Taxing worldwide income and assets will significantly boost government revenues, enabling better public services.
4. Transitional Reliefs: New provisions like the Temporary Repatriation Facility and 4-year tax break provide a smoother transition for affected residents.

Disadvantages:

1. Impact on Wealthy Foreign Residents: High-net-worth individuals may find the new system less attractive, potentially leading to capital flight. Example: An investor with ￡10 million worth of global assets might relocate to a country with no worldwide taxation, such as Monaco.
2. Increased Compliance Burden: Residents must maintain detailed records of foreign income, gains, and assets, adding to administrative challenges.
3. Double Taxation Risks: If tax treaties are not in place, individuals might face double taxation on the same income or assets.
4. Economic Impact: Certain industries, such as luxury real estate, may see reduced demand if high-net-worth individuals choose to leave the UK.

Food For Thought- The shift to a residency-based tax system marks a historic change in the UK’s approach to taxation, promising greater equity and alignment with international norms. While it introduces significant benefits like simplification and increased revenue, the challenges of compliance and potential capital outflows cannot be ignored. Individuals and businesses alike must stay informed and plan proactively to navigate this transformative change effectively.