Why UK's proposed tax changes will make it less attractive for wealthy NRIs

The UK plans to tax global income of NRIs, which may potentially make the country less attractive for relocation

A potential paradigm shift is brewing in the UK tax system, raising concerns for Non-Resident Indians (NRIs), recent migrants, and those considering the UK as their future home. The proposed reforms, expected to be implemented in April 2025, could significantly impact their tax liabilities, necessitate meticulous financial planning, and potentially dampen the appeal of the UK as a migration destination.  

The UK's appeal might diminish due to  the proposed four-year grace period for tax-exempt foreign income since several other European countries like Spain, Portugal, Italy, Malta, Greece, and Switzerland have similar non-domiciled tax regimes, often with longer tax breaks.

Currently, Indian income and capital gains of NRIs are not taxed unless remitted to the UK.

 

NRIs are Indian citizens residing outside of India. Often, they maintain financial ties with their home country through investments and property ownership. New migrants, on the other hand, are individuals who have recently relocated to the UK for work, study, or other reasons.

Current system
 

NRIs can avail of a tax benefit called the "remittance basis of assessment" for the first 15 years of their UK residency. Under this benefit, NRIs only pay UK taxes on income that is brought (remitted) into the UK. Their foreign income held overseas remains untaxed in the UK, regardless of the amount.

Proposed changes

The new regime proposes a significant reduction in the benefit period. Instead of 15 years, new arrivals in the UK will be exempt from paying UK tax on their foreign income (irrespective of remittance) for only the first four years of residency. This means their foreign income earned anywhere in the world will not be subject to UK taxes during this initial period.

Impact after four years:

From the fifth year onwards, things change. NRIs will become liable to pay UK taxes on their worldwide income, including income earned overseas. This essentially eliminates the remittance basis benefit and brings them under the same tax regime as UK residents.

"Under the previous tax regime, certain Incomes of non-domiciled individuals were not subject to tax in the UK as long as these incomes were not repatriated to the UK. This exemption was available to individuals for a period of 15 years and allowed people to plan their taxes accordingly. Under the proposed arrangement, this period has been shortened to five years, making tax planning through redomiciling to the UK a much less tax-attractive proposition than before. High-networth individuals (HNIs) also have to contend with the deemed residential clause in the income tax Act that were introduced recently," says Pallav Pradyumn Narang, partner, CNK.

Implications for HNIs

"This change carries significant financial implications, particularly for HNIs who have hitherto shielded substantial foreign income from UK taxation. Of notable concern are the divergent tax rates between the UK and other jurisdictions, exacerbating potential tax leakage for non-domiciled individuals under the new regime. For instance, previously, a UK resident domiciled in India could avoid UK taxes on global income, unless brought into the UK. However, now, all income, including that earned in India, will be taxable in the UK. Comparing tax rates between the UK and India reveals significant disparities. While the UK's highest band taxes dividends at 40 per cent and other income at 45 per cent, India's rates are 10 per cent for dividends (under the India-UK treaty), 28 per cent on rental income, and 40 per cent on other income,"  says Keshav Singhania, private client leader, Singhania & Co.

Current tax rates in the UK

The highest tax band in the UK currently subjects income (excluding dividends) to a tax rate of 45 per cent. Dividend income falls under a slightly lower tax rate of 40 per cent.

Current tax rates in India for NRIs

The India-UK tax treaty provides a favourable rate of 10 per cent on dividend income earned in India by NRIs. Rental income in India for NRIs attracts a tax rate of 28 per cent, after considering standard deductions. Other income sources for NRIs in India are taxed at a rate of 40 per cent.

This implies an additional tax leakage of 30 per cent on dividend income, 17 per cent on rental income and 5 per cent on other income for NRIs under the new regime.

Ramifications for the UK

Beyond individual impacts, the abolition of non-domiciled status carries broader economic ramifications for the UK. While it is anticipated to bolster tax revenues by subjecting previously untaxed foreign income to taxation, concerns linger regarding the potential exodus of HNIs seeking more favourable tax regimes elsewhere. 

"Countries such as Dubai, Switzerland, and Singapore stand to benefit from this policy change, potentially undermining the UK's status as a global financial hub and challenging its appeal to international investors," added Singhania.

How NRIs minimised taxes previously

Non-domiciled status: The UK tax system offered a benefit for "non-domiciled" individuals (NRIs who don't consider the UK their permanent home).
 

Offshore income exemption: NRIs could keep certain income sources (like investments) offshore exempt from UK taxes for the first 15 years of residency under the "remittance basis of assessment".
 

Tax planning advantage: This 15-year window provided ample time for NRIs to structure their finances and minimise their overall tax burden.

Impact of proposed reforms
 

Shorter grace period: The new regime drastically reduces the tax-exempt period for offshore income to just four years.
 

Reduced tax planning window: With a significantly shorter timeframe, NRIs have less time to implement tax-saving strategies.
 

Relocation incentives weakened: The reduced benefits make the UK a less attractive destination for HNIs solely seeking tax advantages.

"The reduction of the grace period to just five years under the new regime curtails the long-term tax benefits associated with maintaining offshore income streams. This change compels HNIs to reconsider the viability of relocating to the UK for tax purposes, as the time horizon for tax planning strategies is now markedly shorter. Furthermore, the introduction of deemed residence clauses in the income tax Act complicates matters further for HNIs. These clauses deem certain individuals as residents of the UK for tax purposes based on specific criteria, irrespective of their actual physical presence in the country. As a result, individuals and their advisors must navigate a more intricate tax landscape, carefully considering the implications of these regulatory changes on their financial strategies and obligations," says Pallav Pradyumn Narang, partner, CNK.