The UK has announced plans to scrap a longstanding rule, in effect for 225 years, which allows affluent residents to reduce their tax responsibilities on substantial earnings from overseas. These individuals, referred to as “non-doms,” live in the UK while claiming permanent residency elsewhere. This designation enables them to avoid paying taxes on foreign income and profits for up to 15 years after establishing residence in Britain, as long as they don’t bring those funds into the country.
What happens in this taxation method
A “non-dom” is a term used to describe a UK resident whose permanent tax domicile lies outside the UK. This status is purely related to tax and is independent of nationality, citizenship, or residency status, although these factors can influence it. Essentially, a non-dom is only liable to pay UK tax on income earned within the UK. They are not required to pay UK tax on income generated elsewhere in the world unless they choose to bring that money into a UK bank account.
- Domicile of origin – if you were born in a different country from the UK, or if your father came from a different country
- Domicile of choice – if you are over 16 and choose to leave the UK and live indefinitely in another country
New Taxation Policy
Starting in April 2025, individuals moving to the UK won’t have to pay taxes on earnings from abroad for their initial four years. After this period, if they remain in the UK, they’ll be subject to the same tax rules as other residents. Current non-domiciled status holders will have a two-year transition period during which they’ll be encouraged to align their foreign assets with the UK tax system.
The new system will introduce a residence-based test. Under this test, individuals relocating to the UK will only be taxed on their UK-based income and gains for the first four tax years. During this time, no UK tax will be levied on any foreign income or gains, even if brought into the UK. To qualify for this four-year foreign income and gains (FIG) regime, individuals must be within their first four tax years of residence following a period of 10 consecutive tax years of non-UK residence.
Implications of this taxation policy on Indians
The introduction of a residence-based tax system in the UK, slated to begin in April 2025, will have significant implications for Indians considering relocation to the country. Under this new system, individuals moving to the UK will be taxed solely on their UK-based income and gains for the first four tax years. This means that income earned outside the UK during this initial period will not be subject to UK taxation, regardless of whether it is brought into the country. This provision offers a favorable tax environment for Indians establishing residence in the UK, providing a window of exemption from taxes on foreign income and gains. However, adherence to eligibility criteria, including maintaining UK tax residence status and complying with UK tax regulations, will be crucial to benefit from this four-year foreign income and gains regime. As such, Indians planning to relocate to the UK will need to carefully consider the implications of the residence-based tax system and ensure compliance with its requirements to optimize their tax position during the initial years of residence.
Author Bio
