Changes to Taxation of Non-UK Domiciled Residents from 2025

From April 2025, significant changes to the UK tax system will take effect, impacting non-domiciled resident individuals who do not have permanent residency in the UK but currently benefit from a preferential tax regime. These changes will alter the rules that allow non-domiciled residents to avoid taxes on foreign income unless it is brought into the UK. What does this mean for you as a non-domiciled resident? 

For many individuals in this category, the changes will necessitate a reevaluation of financial strategies, placing tax optimization at the forefront. The introduction of new tax regulations will require non-residents to adjust their financial approaches—conducting a comprehensive analysis of their financial structures and, if needed, revisiting investment decisions. Without expert guidance, navigating the complexities of the updated tax framework, preparing assets for the new conditions, and maintaining financial stability can be exceptionally challenging.

Our legal team is ready to provide thorough assistance in understanding the nuances of these changes and helping clients optimize their tax planning to mitigate potential negative consequences. In this article, we will explore the current taxation framework for non-domiciled residents in the UK and outline the upcoming changes set for 2025. Gaining a clear understanding of the new legislative specifics will enable you to act proactively and avoid unexpected financial risks.

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Tax Strategies in the UK: Arising or Remittance Basis?

Non-domiciled residents in the UK currently have the flexibility to choose the tax system that aligns best with their financial situation and foreign income levels. This choice involves two distinct taxation methods:

1. Arising basis: The standard system applied to all UK residents, under which all income—regardless of its source—is subject to taxation in the UK.
2. Remittance basis: A specialized system available exclusively to non-domiciled residents. Under this scheme, taxes are only applied to income generated within the UK, while foreign income is taxed only if it is remitted (transferred) to the UK. This approach is particularly beneficial for individuals with substantial foreign assets, as it allows them to defer taxes on those earnings until they are brought into the country.

However, when opting for the Remittance Basis, an individual forfeits certain personal tax benefits, such as the Personal Allowance and exemption from Capital Gains Tax.

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What Taxes Are Payable Under the Standard Taxation System (Arising Basis)? 

Under the Arising Basis, an individual is required to declare and pay taxes on all income, including foreign income and capital gains. This system covers all primary tax categories, such as income tax, capital gains tax, dividend tax, rental income tax, and inheritance tax. It is important to emphasize that the Arising Basis is automatically applied to all UK residents unless they formally opt for the alternative Remittance Basis by submitting the appropriate application. A more detailed explanation is provided below.  

Income tax applies to all types of income earned by an individual, including:

• Wages and employment income.
• Income from self-employment or business activities.
• Rental income from properties, whether in the UK or abroad.
• Interest on bank deposits, both domestic and international.
• Dividends from shares.

The tax is calculated on a progressive scale:

• 0% – Income within the Personal Allowance, currently set at £12,570 (for the 2023-2024 tax year).
• 20% – Income from £12,571 to £50,270 (basic rate).
• 40% – Income from £50,271 to £125,140 (higher rate).
• 45% – Income exceeding £125,140 (additional rate).

Capital Gains Tax (CGT) is levied on the profit made from the sale or disposal of assets, such as property, shares, businesses, or other investments. Key points include:

• Annual Exempt Amount is set at £6,000 for the 2023-2024 tax year.
• If the capital gains exceed the exempt amount, the following rates apply: 

- 10% for individuals in the basic income tax band (income up to £50,270).
- 20% for individuals in the higher income tax band (income over £50,270).
- 18% or 28% for gains from the sale of residential property, depending on the individual’s income level.

Dividends received from company shares are also subject to taxation. The following tax structure applies to dividends:

• Tax-Free Allowance: Dividends up to £1,000 (for the 2023-2024 tax year) are exempt from tax.
• 8.75% – Dividends within the basic income tax band.
• 33.75% – Dividends exceeding the basic tax band but within the higher rate threshold.
• 39.35% – Dividends taxed at the additional rate (income over £125,140).

What Is Clean Capital?

A key benefit available to non-domiciled residents is the ability to utilize the concept of "clean capital." Clean capital refers to funds accumulated before an individual becomes a UK tax resident. If these funds were earned abroad and the applicable taxes were fully paid in the country where the income was generated, such capital can be transferred to the UK without incurring additional UK tax liabilities.

How to Create Clean Capital?

To ensure funds are recognized as "clean capital" and remain exempt from taxation when transferred to the UK, the following conditions must be strictly met:

1. The funds must originate from income earned prior to becoming a UK tax resident. This means the capital must be accumulated before your official move to the UK.
2. The income must have been taxed in the jurisdiction where it was earned. If taxes were not paid in the country of origin, transferring the funds to the UK could result in additional tax liabilities.
3. Separate accounts. It is crucial to keep "clean capital" in a separate account, distinct from any income earned after becoming a UK tax resident. This prevents the mixing of clean capital with taxable income, as mixed accounts could cause a portion of the capital to be treated as taxable in the UK.

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Changes to Taxation for Non-Domiciled Residents in the UK from 2025

Beginning in April 2025, major changes will abolish the option to use the Remittance Basis, meaning that foreign income will be taxed on the same terms as UK-sourced income, regardless of whether it is brought into the UK. The key changes are as follows:

1. Abolition of the Remittance Basis. All foreign income will be subject to UK taxation, irrespective of whether it is remitted to the UK.
2. Tax Relief for New Residents. Newly arrived residents will qualify for tax relief on foreign income for their first four years of UK tax residency, provided they were not UK residents in the preceding 10 years.
3. Inheritance Tax. Inheritance Tax (IHT) will apply to the global assets of non-domiciled residents who have lived in the UK for the 10 consecutive years immediately preceding their death. Even if a non-domiciled resident leaves the UK, their overseas assets will remain subject to IHT for up to 10 years after their departure.

PLEASE NOTE! Under current rules, inheritance tax for non-domiciled residents applies only to UK-based assets. This means that foreign assets are generally exempt.

       4. Transitional Measures. For individuals currently using the Remittance Basis, transitional reliefs will be available, such as the ability to revalue foreign assets as of April 5, 2019 (applicable to transactions conducted after April 6, 2025), and a reduced tax rate of 12% (instead of the usual 20–45%) during the first two years after the new rules take effect.

Starting in 2025, non-domiciled residents in the UK will face significant changes to their tax regime. The abolition of the Remittance Basis will make it considerably more challenging to minimize tax liabilities. Therefore, it is crucial to take advantage of the current reliefs and benefits before April 2025.

Tax Residency in the UK: How to Mitigate Financial Risks

Relocating to the UK and determining tax residency involve numerous legal and tax intricacies. Missteps in this process can result in significant financial repercussions, making professional guidance indispensable. We offer the following comprehensive services:

1. Tax Residency Status Evaluation: evaluating their current tax residency status, conducting a comparative analysis of tax regimes relevant to the client, and assessing potential risks associated with a change in residency, including capital gains tax, potential changes in the taxation of foreign assets, and other related obligations. 
2. Tax optimization for individuals: analyzing the client’s income sources, both domestic and international, and developing strategies to optimize their tax obligations, utilizing tax reliefs and deductions, optimizing the taxation of investments and capital, and planning for inheritance and gifting.
3. Consultations on inheritance law: developing an inheritance plan, assessing the tax implications of inheritance, optimizing inheritance tax liabilities, and establishing or managing inheritance funds and trusts. 
4. Representation before tax authorities in the country where an individual decides to shift their tax residency: preparing and filing necessary tax documents and declarations, defending the client’s interests in tax disputes, and providing support during the transfer of assets.

Don't wait for tax law changes to start affecting your financial decisions. By reaching out to us, you receive not just legal support but a comprehensive solution designed to help you avoid risks and manage your tax obligations as effectively as possible.

Contact us today, and together we will create a personalized plan that ensures legal security and confidence in your financial future!

¹Non-domiciled residents (non-doms) are typically defined as individuals who live in the UK but whose permanent domicile is located outside the country. This status grants them a special tax regime, allowing them to pay taxes only on income earned within the UK and on foreign income remitted to the UK, excluding income classified as clean capital.

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