2024 election: abolition of non-domicile status and impact on globally mobile employees

For many years, individuals who were not domiciled in the UK have potentially been able to exclude their overseas income from UK taxes. Under the ‘remittance basis’, a non-UK domiciled individual was only taxable in the UK on their UK source income and gains, plus any overseas income and gains that they brought into (remitted to) the UK. 

It had been previously announced that non-domicile status would be abolished from 6 April 2025, although the timing of the general election meant the proposed changes did not have time to become law. However, the new administration included the abolition of non-domicile status in its manifesto, with new rules likely to take effect from 6 April 2025 (but possibly earlier). The new administration has shown that it agreed with the general principles previously announced but differed on the specific terms. 

The remittance basis will be replaced by a residence-based system, which is intended to simplify the tax system while increasing the tax revenue. All individuals resident in the UK during the tax year will be taxable on their worldwide income and gains (but with credit given for overseas taxes where applicable). There will be relief in the early years of residence so that individuals are not discouraged from coming to the UK.

The previous proposal meant that individuals who have been non-UK resident for the previous 10 tax years would not be taxed on their overseas income and gains for the first four tax years, regardless of whether they bring it to the UK. It is expected that the general proposal will remain, although the number of years (both qualifying and available for relief) could change.

Overseas Workday Relief (OWR)

Under the existing regime, OWR allows the earnings related to workdays performed abroad to be exempt from UK tax for the initial three tax years, provided that the funds are not brought into the UK. This relief has proven to be extremely beneficial. However, implementing it can be challenging and has been associated with protracted and intricate tax investigations, often occurring long after the employee has returned to their home country. 

The new administration indicated that it would retain a version of OWR. Under the old proposal, a simplified OWR would also be available for the first three tax years. For new assignees coming to the UK from 6 April 2025 (provided they have not been a UK tax resident in a specified period), the regime change will simplify their tax position considerably for the early years of residence. 

Assignees will no longer need to be concerned about complicated banking structures and avoiding bringing money to the UK. The change to the OWR rules should mean that more employees can exempt their overseas workdays from UK tax, and this will be especially beneficial to employers who tax equalise their employees.

Transitional rules

For individuals who are resident in the UK before 6 April 2025, it is expected that they may partially benefit from the new regime if they have been resident in the UK for less than the number of tax years that relief is available (and they meet the non-residence qualification for the prior years). 

For those who do not meet the requirements to qualify for the new regime, it is expected that there will be a transitional relief, but these will be far less generous than those previously proposed.

Wider considerations for employers

The position for existing assignees, or those who have been resident in the UK previously, is more complicated, with some seeing their global income and gains falling into UK taxation. This may mean that employees are less likely to want to work in the UK, especially if they have significant overseas income or if they have previously been resident in the UK in the qualifying period.

The remittance basis is potentially not the only part of the tax legislation affected by the removal of domicile status. We will need to see whether non-UK domiciled reliefs, such as for home leave costs paid by an employer, will still be available. 

The abolition of domicile status in many parts of the tax system will be a major change in the way that assignees are taxed in the UK, and it will be very important for employees and employers to understand the position before any decisions are made to assign an individual to the UK. Knowing if an employee has previously worked or lived in the UK will be even more important in determining the potential cost of an assignment.

We expect that the new rules will be detailed in September, with changes to be effective from 6 April 2025, although it is not uncommon for some changes to take effect from the date of the announcement. 

If you would like more information on any of the topics discussed above, please contact Ian Jones, Joanne Webber, or your usual RSM contact.