There have been numerous concerns from our NRI client list based out of United Kingdom on the new tax regime announced by the UK Government to be implemented from April 2025. This article provides a detailed examination of these changes and their implications, particularly for non-resident Indians (NRIs) who have historically benefited from the non-dom status.

Understanding the UK’s New Tax Regime for Non-Domiciled Residents: Implications for Non-Resident Indians

The UK government’s announcement in the Spring Budget 2024 heralds a significant overhaul of the taxation system for non-UK domiciled individuals, or “non-doms.” Set to take effect from April 2025, this new policy eliminates the long-standing remittance basis of taxation and introduces a residence-based tax system.

Amendments proposed in the Spring Budget 2024

1. Abolition of the Remittance Basis:

Under the current rules, non-doms can choose to be taxed on their foreign income and gains only when these amounts are remitted into the UK. This has been particularly advantageous for NRIs and other non-doms, allowing them to manage tax liabilities by controlling remittances to the UK. From April 2025, this option will be abolished. Instead, a new four-year foreign income and gains (FIG) regime will replace it, marking a shift towards a simpler, residence-based tax approach.

2. Introduction of the New FIG Regime:

The new FIG regime offers a transitional relief period. Individuals who become UK tax residents after a non-residency period of at least ten years will not be taxed on foreign income and gains for the first four years of their tax residency in the UK. This is designed to ease the transition for new residents and make the UK an attractive place for international talent and investment.

3. Impact After Four Years:

Post the initial four years, all foreign income and gains of these residents will be subject to UK tax, aligning their tax obligations with those of other UK residents. This represents a significant shift for those who previously benefitted from the remittance basis, as it implies a broader scope of taxable income.

4. Transitional Provisions and Reliefs

Recognizing the drastic nature of these changes, the UK government has introduced several transitional provisions:

• 50% Tax Relief for 2025/26: Individuals transitioning from the remittance basis to the new regime in 2025 will be eligible for a 50% reduction in the tax rate on foreign income for that tax year.
• Temporary Repatriation Facility: A lower tax rate of 12% will apply to remittances of pre- April 2025 foreign income and gains for two years, encouraging the transfer of funds to the UK under more favorable terms.

Implications for Non-Resident Indians

For NRIs who have utilized the non-dom status to mitigate UK tax exposure, these changes necessitate a re evaluation of their tax planning strategies. The elimination of the remittance basis means that long-term tax planning will need to be more holistic and inclusive of global income.

In the UK, the tax rates for the highest income band are as follows:

Dividend income: 40%

Other income (e.g., salary, business profits): 45%

These rates apply to residents who fall into the highest tax brackets. For individuals transitioning from the non-dom regime, such as NRIs, their worldwide income will be taxed in the UK after their initial relief period under the new rules.

India-UK Tax Treaty Rates

The India-UK Double Taxation Avoidance Agreement (DTAA) stipulates different tax rates for income derived from one country by residents of the other, which helps avoid double taxation. Key rates include:

Dividend income: Capped at 10%

Rental income: Taxed at 28% after considering a standard deduction (this is a simplification as specific conditions can apply based on various factors like the property type and its use)

Other income: Generally taxed up to 40%, depending on the nature of the income and specific treaty provisions

Furthermore, those NRIs who are considering relocating to the UK or who have recently moved and have not yet been tax resident for more than four years need to understand how these rules will apply to them specifically.

Looking Ahead

The new tax regime underscores the UK’s commitment to simplifying its tax system and making it fairer and more competitive on a global scale. However, it also imposes greater tax liabilities on non-doms, potentially affecting the UK’s attractiveness to international high-net-worth individuals and investors. As these changes are set to transform the landscape of tax planning for non-doms, affected individuals should seek professional advice to navigate the complexities of the new system and optimize their financial planning.