The United Kingdom is prepared to abolish the non-domiciled (“non-dom”) tax status from April 6, 2025. This is a significant reform which will mean that all UK residents, regardless of their domicile, will be taxed on their worldwide income.
Current Tax Rules In The UK For Non-Domiciled Individuals
Under the current tax rules Australians who live in the UK are taxed according to their domicile status and the nature of their income. An Australian who is not domiciled in the UK may make a claim to be taxed on foreign income on a remittance basis, meaning you are only taxed on any UK-source income and gains plus any foreign income remitted to the UK.
They are also able to return home to Australia without worrying about any ongoing impact of UK taxes for anything other than assets that remain in the UK.
How The UK Tax Rules Are Changing
There are a number of key aspects of the proposed changes which could have a significant impact on Australians in the UK. These include:
- Abolition Of The Remittance Basis
Under the new system, individuals will be taxed on their worldwide income, similar to the way that Australian residents are taxed on their worldwide income. This means that while living in the UK you will need to include any income that you earn from Australian investments or income sources in other countries, even if you don’t bring that money into the UK.
2. Introduction Of A Four-Year Foreign Income And Gains Regime
On the positive side, new arrivals to the UK, who have not been UK tax residents in the previous ten consecutive years, will benefit from a new four-year period during which they receive 100% relief on foreign income and gains. This relief applies irrespective of whether the income is remitted to the UK. This effectively allows individuals to live in the UK for 4 years without having to worry about the consequences of bringing in their overseas income, and may make it more appealing for Australians to live in the UK on a short term basis that does not exceed this four year period.
3. Imposing Inheritance Tax (IHT) Even After Departure From The UK
The domicile-based system for IHT will be replaced with a residence-based system. In addition, expats who return to Australia after the new rules are in place may be exposed to IHT for up to 10 years after leaving the UK. This makes estate planning more complex for any Australians living in or returning from the UK.
4. Capital Gains (CGT) On Worldwide Capital Gains
Australians who previously benefited from the remittance basis will now face UK CGT on all gains from worldwide assets, even if those gains are not brought into the UK.
Transitional Rules
There are a number of transitional rules that will help ease UK residents into the new tax system.
Individuals who have previously been non-domiciled and used the remittance basis of taxation will have the option to value their foreign capital assets as of April 5, 2017. This creates a new capital base value to avoid CGT applications on the increase of value up to that date.
Current non-dom individuals will also have access to a transitional discounted tax rates on their previously unremitted foreign income and gains until the 2028 tax year.
Practical Steps To Take If You Stay In The UK After April 6, 2025
Australians who are currently non-domiciled residents of the UK, who decide to stay in the UK, should take practical steps to minimise their UK tax exposure and optimise their financial position. Key actions include:
- Revaluing assets held outside the UK prior to April 2017 for CGT purposes.
- Selling assets before April 2025 if advantageous.
- Utilising transitional tax reliefs by obtaining the right advice from a tax specialist.
- Maximising the four-year tax exemption (if eligible).
- Reviewing investment strategies, retirement planning and estate planning strategies to factor in the new tax consequences of remaining in the UK.
- When assessing the timing of potentially returning to Australia, consider the impact of Inheritance taxes if you live in the UK for 10 years or more.
- Keep clear records and obtain up to date tax advice to mitigate tax consequences.
It is important to engage an international tax specialist to complete a personalised assessment for tax planning in your specific situation.
Revalue Australian (And Other Foreign) Assets
You should obtain formal or independent valuations for properties, shares, and other investments as of 6 April 2017.
The UK is offering a one-time rebasing relief, allowing individuals who previously used the remittance basis to revalue their foreign assets to April 6, 2017, for Capital Gains Tax (CGT) purposes. This means only gains accrued after April 6, 2017, will be subject to UK CGT when the asset is sold. This relief is not applicable if you were deemed to be domiciled at some point between 6 April 2017 and the introduction of the new tax laws on 6 April 2025.
Plan Asset Sales Before April 2025
If you are planning to sell Australian assets:
a) Consider if there is an overall benefit in selling these assets before April 6, 2025 to avoid UK CGT.
b) If selling after April 2025, use the rebasing relief to reduce taxable gains.
c) Review whether holding assets via a trust or corporate structure might help in specific cases. If so, it may be possible to sell individually owned assets to a corporate structure that you control prior to April 6 2025.
After April 2025, all worldwide capital gains (including on Australian assets) will be taxed in the UK unless you are living in the UK for less than 4 years.
Use Transitional Tax Discounts
Take advantage of any transitional rules where possible.
a) If receiving Australian rental income, dividends, or business profits, consider bringing forward earnings to take advantage of this discount.
b) If withdrawing funds from an Australian trust or investment portfolio, consider timing withdrawals within this period.
For tax relief that is based on timing and access to transitional rules it is important to obtain correct and up to date tax information from the relevant tax specialist.
Consider How To Utilise The Four-Year Foreign Income And Gains Exemption For New Arrivals
If you have not been a UK resident in the previous 10 years then you can utilise the new four-year foreign income exemption.
a) New and recent arrivals in the UK should utilise this period of exemption to plan and structure income sources for optimal tax outcomes.
b) Where you have control over timing of income, consider triggering capital gains or significant foreign income events within the four-year exemption period.
Notably, under the new rules the four-year exemption applies regardless of whether the funds are brought into the UK. This means that any Australians who were not UK tax residents in the previous 10 years will not be taxed on foreign income or gains for their first four years in the UK. This gives Australians a good opportunity to live in the UK on a short-term basis without being impacted by the new rules.
Review Australian Superannuation And Pension Taxation
Engage a tax specialist to complete tax planning strategies for your retirement and review any current and upcoming lump sum or pension income.
a) Obtain long term advice on tax planning strategies that take into consideration the way the new rules will impact any UK tax on lump sum withdrawals or pension income from Australian super funds.
b) If applicable, time superannuation withdrawals strategically before tax rates increase.
c) Consider the types of investment income you are currently earning from Australia. Understanding the tax consequences of these changes gives you the opportunity to assess optimising your ongoing investment and income strategies.
With the tax rules changing, it is important to understand how this could impact your long-term and immediate investment and retirement plans so you can make informed decisions about your finances.
Plan For UK Inheritance Tax (IHT) On Worldwide Assets
The UK imposes an inheritance tax (IHT). Under the new rules IHT will apply to worldwide assets.
a) Consider trusts or corporate structures to protect assets from UK IHT.
b) Review wills and estate planning to align with both UK and Australian tax laws.
c) If planning to leave the UK, remember IHT exposure may continue for 10 years after departure.
Under the new rules, individuals who have been a UK tax resident for 10+ years will be subject to IHT on worldwide assets. This includes Australian property, shares, and businesses. It is therefore important to revise your inheritance strategies if you will be a long term UK tax resident. You should also consider the impact of IHT when assessing timing for making a move back to Australia, as you may be able to avoid IHT by making an earlier move.
Maximise Double Tax Relief And Tax Credits
Talk to an international tax specialist to ensure you have appropriate, current and up to date tax planning strategies in place that consider the new rules. With the UK taxing worldwide income it will be more important to utilise double taxation relief provisions to minimise your tax exposure.
a) Keep detailed tax records to claim foreign tax credits efficiently.
b) Engage an international tax advisor to structure investments efficiently.
The UK-Australia DTA can mitigate double taxation, but relief must be claimed properly as certain income types (e.g., rental income) may still be taxable in both countries.
In Summary
The new rules will have a significant impact on Australians living in the UK, both while they are living in the UK, and when they return home. For more about the tax implications of returning to Australia under the new rules see our article Australians Living In The UK: Returning To Australia Under The New Non-Dom UK Rules.
While the new rules may reduce the tax impact of residing in the UK for a period of less than four years, long-term residents will now be liable for UK taxes on their worldwide income. This is a significant departure from the current income remittance rules and will mean any Australian currently residing in the UK should seek tax advice regarding their worldwide assets and investments.
