The UK’s residence-based regime of April 6 2025: explainer

A contractor’s guide to Autumn Budget replacing the ‘non-dom’ system in favour of a residence-based regime.

To us directly and as my LinkedIn feed shows, more than a few individuals who work professionally but temporarily are inquiring about Autumn Budget 2024’s significant change to UK tax law on April 6^th 2026 – when ‘non-dom’ will be replaced by a new residence-based test.

Farewell to non-doms…hello (again to) UK residence test!

Here, exclusively for ITContracting.com is my overview of the new test, writes Kevin Austin, managing director of Access Financial.

It’s a test  that the government threateningly describes as a residence-based “regime”, even though rather innocuously, it is based on the existing UK Statutory Residence test.

And I will also give a sense of the ‘new’ test’s potential long-term impact, including for an individual on my LinkedIn feed who nobody felt sorry for despite them asking for advice quite politely — a non-domiciled individual living in Monaco.

The UK’s old ‘non-dom’ rules (before April 6th 2025)

The UK previously taxed individuals based on their domicile, which refers to where they consider their permanent home rather than solely on their residence.

• Non-domiciled individuals can pay tax solely on UK-sourced income and any foreign income they bring into the UK.
• After residing in the UK for 15 out of 20 years, non-domiciled individuals become “deemed domiciled” and lose the remittance basis.

The UK’s new rules, AKA the residence test (effective from April 6th 2025)

• The new system emphasises residence. The most significant change is shifting from “domicile” to “residence” for tax purposes. This means the tax system will focus on where you live rather than your country of origin or long-term intentions.
• The concept of “deemed domicile” has been abolished and replaced with a simpler system focusing on residency.

The UK residence test

Although the specific details may still change, here are the main points of the UK’s new residence test:

• You are automatically a UK resident if you spend 183 days or more in the UK in the tax year.
• Even if you spend fewer than 183 days in the UK, you could still be considered a resident if you have significant ties to the UK.

These ties include:

• a family home in the UK;
• a spouse or children residing in the UK;
• substantial work activities in the UK; and
• spending more time in the UK than in any other country.

The rules also consider the time you spend in the UK during different parts of the tax year.

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An example of how UK residence test affects a non-domiciled resident of Monaco

While you might not immediately identify with the invariably cocktail-sipping LinkedIn user mentioned at the top, a quick look at someone living in Monaco might help to illuminate what the new UK residence-based test means, in practice.

• Effective from April 6th 2025, the “remittance basis” of taxation, which permitted non-domiciled individuals to only pay tax on foreign income and gains brought into the UK, will be abolished. If individuals like Mr Monaco started spending considerable time in the UK, they would likely be deemed UK residents under the new test.
• Under the new rules, Mr Monaco’s worldwide estate may become liable for UK inheritance tax, after they have resided in the UK for 10 years.

‘Passing’ the UK new residence test

This is one test where it’s not actually  about ‘passing’ or ‘failing.’

Instead, the test assesses your residency status based on your specific circumstances.

To be “classified” as a UK resident, the individual residing in Monaco, for example, must meet certain criteria.

Three ways to help avoid being deemed UK resident from April 6th 2025

To reduce the chance of being deemed resident in the UK, Mr Monaco must:

• Limit the time in the UK to less than 183 days each tax year.
• Minimise connections in the UK, such as family homes or significant work activities.
• Establish a clear tax residence in Monaco and demonstrate strong ties there.

Introducing the Temporary Repatriation Facility

At Autumn Budget 2024, where non-dom status was axed and the replacement of the UK’s new residence test promised (at chapter 2.56), the Treasury said it would establish transitional rules.

In particular, individuals claiming the remittance basis can utilise a new “Temporary Repatriation Facility” to bring foreign income and gains, accrued before April 6th 2025, to the UK with favourable tax treatment.

These rules are intended to provide clarity and support for those already classified as non-doms, ensuring they are not adversely affected by the new regulations.

Such provisions are designed to address the unique circumstances of existing non-doms, allowing them to navigate the transition smoothly while maintaining compliance with the updated framework.

Overseas Work Relief

Previously, so-called Overseas Work Relief (OWR) was linked to an individual’s domicile status.

However, starting from April 6th 2025, eligibility will be based on residency.

This means that anyone who qualifies for the new four-year Foreign Income and Gains (FIG) regime will be eligible, regardless of their domicile status.

From April 6th 2025, the requirement to have income earned from overseas workdays paid into an offshore account, rather than remitted to the UK, will be removed.

The maximum period for claiming OWR has been extended from three to four years, aligning it with the FIG regime.

At the same time, a new annual cap on the amount of relief that can be claimed will be introduced. This cap will be the lower of 30% of the individual’s qualifying employment income or £300,000.

The separate relief for “chargeable overseas earnings” will be abolished. This income will be taxable on the remittance basis if it is brought to the UK after April 6th 2025.

What does this medley of changes to OWR/FIG mean?

The reforms aim to make the Overseas Workers Relief (OWR) more accessible by connecting it to residency, eliminating the offshore income requirement, and extending the relief period.

However, the introduction of an annual cap restricts the total amount of relief available, especially for high earners.

If you are unsure about where you stand, seek expert advice.

Modernisation, at a potential cost

The new UK residence test and accompanying changes to remove non-dom as a system, modernises an area of tax law which is probably overdue — insofar as it is (currently) based on usage more relevant to the UK’s imperial past.

However, these rules have made the UK something of a tax haven for wealthy foreigners. These individuals could choose to live in the UK and be taxed only upon the income that they brought to the UK or assets that they acquired here.

Therefore, while outmoded, the framework had positive benefits in attracting the rich to the UK without exposing them to the full range of UK taxation.

Finally, Labour must beware unintended consequences

What the relatively new Labour government needs to bear in mind is that there are always unintended consequences to such tax changes. So much so, that while the new residence-based regime may appear more modern, and fairer, wealthy individuals — like nobody’s LinkedIn friend Mr Monaco — are mobile and have an array of lifestyle choices, meaning that collectively the changes will probably result in a net long-term loss to HM Treasury.