Reforms to the taxation of non-UK domiciled individuals.
New Rules from 6 April 2025
Following the Autumn Budget on 30 August 2024 the UK government released a further technical note and some (not all) draft legislation relating to the new tax regime which will apply for non-UK domiciled individuals. Some of the positive changes which will be introduced from 6 April 2025 will be a welcome start to anyone who has not lived in the UK for the last 10 years and who is considering a relocation into the UK. A four-year window in which to bring eligible foreign income and gains into the UK without a tax charge will surely be welcomed. However, the impact on our current non-UK domiciled community may be more challenging. We set out below a summary of the new rules.
The period of consultation that followed earlier editions of the technical notes seems to have had some impact on the forthcoming changes. Not least, we note that the inheritance tax tail (the IHT Tail) which was initially set to a ten-year period has now been reduced according to the length of time an individual has been resident in the UK.
There have been some amendments to the Temporary Repatriation Facility rules to include foreign income and gains currently held within trusts to be remitted at the lower rates and for a longer period and such remittances are not required to be remitted in the year they are claimed they can be remitted into the UK at a later date.
There is also a disapplication of the gift with a reservation rules for non-UK assets settled into trust before Budget Day, 30 October 2024, but some excluded property trusts where the settlor remains a long term resident of the UK will fall into the relevant property regime.
The Existing Rules
Non-UK domiciled individuals who are resident in the UK who have not formed the intention to remain in the UK permanently or indefinitely can use a specific tax regime known as the remittance basis of taxation where they pay income tax and capital gains tax only on assets brought into the UK or on income or gains generated in the UK.
Non-UK income and gains remain outside the scope of UK taxation unless they are remitted into the UK and only assets situate in the UK are subject to Inheritance Tax (IHT) in the UK.
Once the non-UK domiciled individual has been in the UK for fifteen out of the preceding twenty years they become deemed domiciled for all tax purposes. This means that they will pay UK capital gains tax (CGT) and income tax on their worldwide income and gains, and they are subject to IHT on their assets wherever located. Should they leave the UK they will remain in the UK IHT net for a further three years after they leave the UK.
Non-UK Domiciled individuals can protect their assets from falling into the UK IHT net by settling a ‘Protected Settlement’ before becoming deemed domiciled in the UK. The ‘Protected Settlement’ would shelter the assets from UK IHT and allowing gains and income to roll up within the Protected Settlement over time without being taxed until the assets are distributed.
The Forthcoming Changes
From 6 April 2025, the concept of domicile as a relevant connecting factor in the UK tax system will be replaced by a system based on UK tax residence. Please note that whilst the concept of domicile might be replaced for the UK tax system it will still be relevant as private international law concept for the application of the rules to the devolution of a non-UK domiciled individual’s estate.
These are the main changes that will apply from 6 April 2025 to the taxation of non-UK domiciled individuals already resident in the UK, and to other individuals who are arriving to the UK for the first time, or after an absence from the UK of at least ten consecutive years. These ‘arrivers’ can also be UK nationals/UK domiciled. This is a change from the previous beneficiaries of the remittance basis of taxation.
The headline changes:
- a new 4-year foreign income and gains (FIG) regime for new arrivers into the UK to benefit from tax relief.
- a new Temporary Repatriation Facility (TRF) allowing individuals previously taxed on the remittance basis to designate amounts derived from pre-6 April 2025 FIG, and pay a reduced tax rate for a period of three tax years, starting from 6 April 2025 for the tax year 2025/2026 onwards. This facility will also be extended to distributions from qualifying overseas trust structures.
- Reform to the current Overseas Workday Relief (OWR) by removing the need to keep the income offshore, extending the period that employees can benefit from the relief from three to four years and introducing an annual financial limit on the amount claimed.
- IHT application reform to replace the current domicile-based system with a residence-based system.
- The implementation of a 4-year foreign income and gains (FIG) regime
Under the current rules, UK resident non-UK domiciles who have not become deemed domiciled can choose to be taxed on the remittance basis. This means that whilst they pay tax on their UK income and gains in the same way as other UK residents, they only pay tax on their FIG when these are remitted to the UK. From 6 April 2025, all UK residents will be taxed on the arising basis of assessment, subject to the new FIG rules.
Who can use the FIG regime? Is now the time to return or relocate to the UK?
| ARRIVERS TO THE UK: The new residence based regime will provide 100% UK tax relief on eligible FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in the 10 consecutive tax years immediately prior to their arrival. This means they should not have been resident in the UK for tax years 2013/2014 onwards. UK tax residence will be assessed in line with the current rules under the Statutory Residence Test but split years and years of non-UK tax residence under a double tax treaty will be counted as years of residence for these purposes. Please note that the double tax agreement tie breaker cannot be used to determine eligibility i.e. non-UK residence under the DTA or a split year will not be taken into account as non-UK residence to benefit from the FIG regime. |
What if the individual is already resident in the UK?
| Where the individual is in their first four tax years of UK residence and had a period of ten consecutive years of non-UK residence they can use the FIG Regime for the remainder of their first four years of residence. |
What if the individual is a UK national or UK domiciled?
| In a new move individuals who are UK domiciled or who are UK nationals who may not have qualified for the old remittance based regime can also use the FIG Regime. |
What if the individual leaves the UK temporarily in the four-year period?
| There is no roll over of missed years. The individual can only claim the FIG regime for the qualifying tax years remaining. |
Which assets are eligible for the FIG regime?
| The FIG regime will not apply to any assets which were generated during a period in which they were taxed on the remittance basis. The individual should check to see if they can use the TRF (see below). Before assuming a FIG will benefit from the FIG regime it is advised that the type of FIG is checked for eligibility against the criteria set out in the draft legislation. Please note that an asset that derives at least 75% of its value from UK land where that person has a substantial interest in land will be treated as a UK situs asset and therefore cannot be FIG. |
When should a FIG be remitted?
| A claim under the 4-Year FIG regime will succeed irrespective of it being remitted in that year or later without incurring a further tax charge. The individual must declare all of their FIG arising in the four-year period in a disclosure to HMRC in order to benefit. |
How to Claim?
| Claims should be made on the self-assessment tax return before 31 January in the second tax year after the relevant year to which the claim relates. The claims for income and capital gains are separate and do not both need to be made. In the year that a claim is made no foreign income losses or capital losses can be claimed as arising in the year the claim is made. This also applies if an election is made for OWR. The claim is made on a source by source basis. It is not necessary to make a claim on all sources of foreign income or foreign gains. The individual can choose what they claim. |
How does this apply to the Personal Allowance for Income Tax and the Annual Exempt Amount for CGT?
| The individual will lose their Personal Allowance for Income tax and the Annual Exempt Amount for CGT in the tax year that they made the claim or make an election for OWR. |
What if no FIG regime claim is made?
| Where a claim has not been made the income or gains may be subject to full UK tax in the normal way. |
What if an individual who is eligible to use the FIG regime receives a foreign income distribution from a discretionary settlement?
| Where a beneficiary receives a discretionary income distribution from a non-resident settlement it is treated as the untaxed income of the beneficiary even where the trustees have paid tax on the distribution. Where the trust distribution is made up of foreign income full relief will be available if the individual makes a claim in the correct four years for the FIG regime. Care should be taken if the individual makes an ‘onward gift’ or onward payment of the income received to another person who cannot use the FIG regime. |
What if it is a life interest in a settlement?
| Again an application can be made for full relief of their interest in foreign income under the FIG regime. |
What if income tax is chargeable on income arising to a transferor as a result of the Transfer of Assets Abroad rules?
| Again an application can be made for full relief under the FIG regime where this income is non-UK source income. Amendments will be made to the ToAA rules accordingly. |
Will capital payments from overseas settlements be matched to gains within the settlement? | The benefit will not be matched to unmatched gains within the settlement. There will be further modifications on this point and additional transitional protected income rules. |
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EXISTING/FORMER REMITTANCE BASIS USERS | All former remittance basis users, who are not eligible for the 4-year FIG regime will pay tax at the same rate as other UK resident individuals on any newly arising FIG like any other UK taxpayer. Former remittance basis users will continue to pay tax on FIG that arose before 6 April 2025 that they remit to the UK. |
- The new Temporary Repatriation Facility (TRF)
Non-UK domiciled UK resident individuals who have been taxed on the remittance basis will be able to use the new Temporary Repatriation Facility (TRF).
Individuals who have previously claimed the remittance basis and have untaxed FIG will be able to make an election to designate amounts derived from previously untaxed and unremitted FIG that arose prior to 6 April 2025, for a period of 3 tax years from 6 April 2025.
Designated amounts will be charged to tax at a rate of 12% in tax years 2025/2026 and 2026/2027, with the rate rising to 15% in tax year 2027/2028.
Any remitted ‘designated amounts’ will not otherwise be charged to UK tax. The TRF will be available provided the individual is UK resident in the relevant tax years.
The TRF will also be available for qualifying UK resident settlors or individuals who receive a benefit from an offshore trust structure during the 3 tax years from 6 April 2025. To qualify the relevant individual must be a former remittance basis user, the benefit must be received during the TRF period and must be capable of being matched to FIG that arose within the settlement before 6 April 2025.
Where individuals make a designation under the TRF and have paid the TRF tax charge they will have the freedom to choose in which year to remit the designated amounts to the UK (if at all). This does not need to be in the TRF window and it could be in a later tax year.
- Overseas Workday Relief (OWR)
OWR will be retained and will still be based on income which relates to overseas duties determined on a just and reasonable basis. From 6 April 2025, eligibility for OWR will be primarily based on whether employees are eligible for the 4-year FIG regime. This will provide relief from income tax for a 4-year period, regardless of whether these earnings are brought to the UK or whether they are paid into an overseas account.
Individuals will be required to make an annual OWR election for each year that the FIG regime applies
There is a cap on earning as the lower of 30% of earnings or £300,000 for each year an election is made. If individuals are already eligible for OWR the application of the cap should be reviewed.
- Inheritance Tax application - The IHT Tail
There are some notable changes in this respect. For the first 10 years of an individual’s residence in the UK, IHT will apply only to UK assets (or assets whose value derives directly or indirectly from UK residential property).
The test for whether non-UK assets are in scope for UK IHT will be whether an individual has been a long term resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises
The time the individual remains in scope after leaving the UK the IHT Tail will be shortened where they have only been resident in the UK for between 10 and 19 years. From 13 years of UK residence the IHT Tail will be 3 years, 14 years the IHT Tail will be 4 years etc. There will be an IHT Tail of a maximum of 10 years after a 20-year period of residence.
No of years of UK Residence | IHT Tail |
More than 19 years | 10 year tail |
19 years | 9 year tail |
18 years | 8 year tail |
17 years | 7 year tail |
16 years | 6 year tail |
15 years | 5 year tail |
14 years | 4 year tail |
10 - 13 years | 3 year tail |
Less than 10 years | No IHT Tail |
Protected Settlement
In a move away from the current position Protected Settlements will lose their protected status. This means that trusts settled by long term non-UK domiciled UK residents will be brought into the current UK IHT regime.
Settlor Interested Trust Structures
The income tax and capital gains tax protection on FIG arising within settlor-interested trust structures will no longer be available for non-UK domiciled and deemed domiciled individuals who do not qualify for and claim the 4-year FIG regime from 6 April 2025. Any FIG arising in the trust from April 2025 will be taxed on the settlor on the same basis as UK domiciled settlors unless they are eligible and claim the FIG regime.
Advice should be sought on whether it is worth winding up the trust or making distributions and using the TRF.
For UK IHT purposes trusts settled by non-UK domiciled individuals who have been long-term resident in the UK for more than ten years by April 2025 will fall into what is known as the Relevant Property Regime and will incur a ten-yearly charge for UK IHT at 6%.
UK resident, Non-UK domiciles who are not yet deemed domiciled in the UK still have time to settle non-UK assets into trust ensuring that they cannot benefit from these trusts personally. This would provide some protection from UK IHT by removing the assets from the settlor’s estate. However, after April 2025 the trust will fall into the Relevant Property Regime and be subject to the ten-yearly charges.
UK resident, non-UK domiciles who have been in the UK for less than 10 years will still be able to settle non-UK assets (whose value does not derive directly or indirection from UK residential property) into trust after April 2025 without triggering a UK IHT charge.
Rebasing the value of capital assets.
Non-UK domiciles who are UK residents who are unable to use or choose not to make a claim under the FIG regime will be subject to CGT on their foreign gains in the normal way. For CGT purposes, current and past remittance basis users can rebase their personally held foreign assets to the market value as at 5 April 2017 on a disposal where certain conditions are met.
The conditions are:
- The individual must not have been UK domiciled or deemed domiciled at any time before April 2025.
- They must have made a remittance basis claim in one of the tax years 2017/2018 to 2024/2025. (Not including years where the individual has automatic use of the remittance basis without a claim being required because of the amount of their unremitted FIG for the tax year is under £2000 or their income and gains is limited).
- They must have held the relevant asset on 5 April 2017 and dispose of it after 6 April 2025. Such asset must be located outside the UK from 6 March 2024 to 5 April 2025.
The applicable rate of CGT will be 24%.
Whether you are considering a relocation or considering your options as a current UK resident non-UK domicile we can assist you. Please contact Catherine Pugsley or Anna Gaston on 0207 222 5381 to discuss this further.