The Conservative Government announced in their Spring Budget in March 2024 that the remittance basis for non-domiciled individuals would end in April 2025, and a new residence-based system for Inheritance Tax (IHT) would be introduced. The new Labour Government has taken the opportunity to put their stamp on the new rules by further tweaking the proposals.
The Government has now published the Finance Bill for consideration by Parliament. This outlines the planned changes to legislation. With such fundamental changes to the current system, you should make sure you’re ready for the new regime. It will be important that affected individuals take early advice.
Current regime: the remittance basis
Until 5 April 2025, individuals who are UK resident, but non-UK domiciled will still have the option to claim the remittance basis of taxation. This means they pay UK tax on their UK sourced income and gains but will only pay tax on their foreign income and gains to the extent that they are remitted to the UK.
Anyone who has been resident in 15 out of the previous 20 tax years is deemed domiciled for UK tax purposes and can no longer claim the remittance basis. From that point onwards, they must pay tax in the UK on their worldwide income and gains as they arise. At this stage, the individuals non-UK assets enter the scope of IHT.
Foreign Income and Gains (FIG) regime
From 6 April 2025 the remittance basis will be replaced by the new FIG regime. Which in the Government’s own words is ‘an internationally competitive residence-based regime’. This will provide 100% relief from UK tax 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 tax years immediately prior to their arrival. After these four years, the individual will be subject to tax in the UK on their worldwide income and gains.
Where a claim under the 4-year FIG regime has been made, any of the amounts subject to the claim for that year, can be remitted to the UK either in the tax year that the FIG arises, or at a later date, without any charge to UK tax.
From 6 April 2025, all former remittance basis users who are not eligible for the new FIG regime will pay tax at the same rate as other UK resident individuals on any newly arising FIG, thereby removing the preferential tax treatment for non-doms. Any pre-6 April 2025 FIG that had been the subject of a remittance basis claim, will still be taxed in the UK if it is remitted.
Existing remittance basis users who are yet to complete four full tax years of residence can also benefit from the FIG regime. This will rely on them having been non-UK resident for 10 years before their arrival. For example, if an individual is UK resident for the tax years 2023/24 and 2024/25, they will have been resident for two tax years and therefore will benefit from two tax years of taxation under the FIG regime for 2025/26 and 2026/27.
An individual’s ability to qualify for the 4-year FIG regime will be determined by whether they are UK resident under the Statutory Residence Test (SRT). An individual cannot qualify if they have been UK resident under the SRT in any of the 10 years prior to arrival, and being treaty resident elsewhere under a Double Tax agreement will not be relevant for the purposes of determining eligibility.
Any tax years which are regarded as a split year under the SRT, will count as a full year of UK residence for the purposes of the 4-year FIG regime.
Overseas Workday Relief (OWR)
From 6 April 2025 OWR will provide Income Tax relief on earnings relating to work performed abroad, regardless of whether those earnings are brought to the UK or remain offshore. This extends the existing regime from three years to four years and will primarily be based on whether employees are eligible for the 4-year FIG regime. However, the OWR will be subject to an annual financial limit for each qualifying year: the lower of 30% of the qualifying employment income or £300,000 per tax year.
Temporary Repatriation Facility (TRF)
This facility will be available for individuals who have been taxed on the remittance basis. Those individuals, who have untaxed FIG from pre-6 April 2025 will be able to make an election to designate amounts of that income for a period of three tax years from 6 April 2025.
Designated amounts will be charged to tax at a rate of 12% in 2025/26 and 2026/27, rising to 15% in 2027/28. 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.
Individuals who make a designation under the TRF and pay the TRF tax charge can remit the designated amounts at a time that suits them. This does not need to be in the TRF window and could be in a later tax year.
Capital Gains Tax (CGT) rebasing
Those UK resident individuals who do not, or cannot, claim under the 4-year FIG regime, will be subject to CGT on foreign gains in the normal way. Those taxpayers who have made a remittance basis claim for any one of the tax years 2017/18 to 2024/25 (not including years where you have qualified for automatic remittance basis by virtue of having unremitted FIG in the year of under £2,000), can choose to rebase a personally held foreign asset to its market value at 5 April 2017.
As well as meeting the above condition to have claimed the remittance basis, you will have to have not been UK domiciled, or deemed UK domiciled, under the current rules, at any time before the tax year 2025/26, and you must hold the relevant asset at 5 April 2017 and dispose of it on or after 6 April 2025. Lastly, the asset must have been situated outside the UK from 6 March 2024 to 5 April 2025.
Inheritance Tax (IHT)
The domicile-based system for IHT is being replaced by a residence-based system from 6 April 2025. UK situs assets will remain in scope for IHT on the same basis as at present, regardless of residence, but non-UK assets will be within the scope of UK IHT if an individual has been resident in the UK for at least 10 out of the last 20 years immediately preceding the tax year in which the chargeable event (such as death) arises. Taxpayers satisfying this residence criteria will be referred to as “long term resident” and this will create a ‘tail’ effect on leaving the UK and ceasing to be UK resident.
IHT will be charged on non-UK assets owned outright when a person is long-term resident.
There will be transitional rules for non-domiciled or deemed domiciled individuals who are non-resident in 2025/26. They will only be classed as long-term resident if they have been resident for at least 15 out of the 20 tax years immediately preceding the year of charge, and for at least one of the four tax years ending with the relevant tax year. If, and when, they return to the UK, the new rules will apply.
If you do not qualify for these transitional rules and fall under the definition of “long-term resident” and you then leave the UK and do not return before the chargeable event (such as death), then you may be caught by the ‘tail’ of the legislation, leading to an IHT charge on non-UK assets. This 10-year tail can be shortened; to determine whether you are eligible you have to look back at the 20 year period from the last tax year for which you were UK resident. Then for those who are UK resident in that 20 year period for 13 years or less, they will remain “long-term resident” for three tax years after ceasing to be UK resident. This will then increase by one tax year for each additional year of residence i.e. if resident for 17 out of 20 tax years on leaving, they would remain in scope (long-term resident) for seven tax years. This may mean that you have to look back almost 30 years, to determine your position.
After 10 consecutive years of non-UK residence, the test is effectively reset, even if a taxpayer then returns to the UK. This aligns the rules with the FIG regime for income and gains.
What should I do next?
Existing and prospective UK residents should use the time between now and 6 April 2025 to acquaint themselves with the new regime. Conversations should start now to find out about any tax planning opportunities and prepare for a system of residence without domicile.
If you would like further guidance on any of the issues raised, please contact Stephen Kenny or Karen Anderson.
