August update for non-UK domiciled individuals

The Labour government have announced their plans for changes to the UK regime for non-UK domiciled individuals for Income Tax, Capital Gains Tax (CGT) and Inheritance Tax. It should be stressed that these remain proposals only and can change.

Further to the announcements made by the previous government at the last UK Spring Budget, the new Labour government have now released their policy summary, setting out their proposals for the abolition of the remittance basis of taxation for UK resident non-UK domiciled individuals (“non-doms”) and their proposed changes to the UK inheritance tax regime. 

The previous government announced that from 6th April 2025 the remittance basis of taxation for UK resident non-UK domiciled individuals will be abolished and replaced by a new four-year foreign income and gains (FIG) regime. The Labour Government will follow through with this change and the proposed timeline, however they have made changes to some of the transitional arrangements that were proposed at the time and have removed what they felt were certain advantages for non-doms left by the previous government.  

We recap on the operation of the 4-year FIG regime further below but will focus here on the changes to what was announced at the Spring Budget.

How the proposals by the Labour government differ to those announced at the Spring Budget:

The transitional arrangement announced by the previous government, providing a 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime, will not be introduced.

For Capital Gains Tax purposes, current and past remittance basis users will be able to rebase foreign capital assets they hold to their value at the rebasing date when they dispose of them. The government is considering the appropriate rebasing date and will set this out at the Budget.

A new Temporary Repatriation Facility (TRF) will be available for individuals who have been taxed on the remittance basis. Individuals that have previously claimed the remittance basis will be able to pay a reduced tax rate, for a limited time period after the remittance basis has ended, on the remittance of FIG that arose prior to 6 April 2025. The government are reviewing how the make the rate and time limits for the TRF as attractive as possible.

The government is also exploring ways to expand the scope of the TRF, including to stockpiled income and gains within overseas structures, and will confirm further details at the Budget.

The government intends to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad rules and legislation for Settlements to make these simpler and ensure that they are effective. It is not anticipated that this review will result in any changes before the start of the 2026/27 tax year.

New residence-based regime for inheritance tax:

The Labour government have announced some of their plans for the operation of the new UK inheritance tax rules. The basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with rules to keep a person in scope for 10 years after leaving the UK.

IHT charges arising on deaths occurring before 6 April 2025 will be unaffected by these changes and will be charged according to the existing rules.

The government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT. Everyone who is in scope for UK inheritance tax will pay tax in the UK on non-UK assets held in such trusts. The government recognises that trusts will already have been established and structured to reflect the current rules, so is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements.

Re-cap on the operation of the four-year FIG regime from 6th April 2025 (as announced by the previous Government):

• To qualify for the new FIG regime, individuals will need to have had a period of 10 tax years of non-UK residence.
• The regime will allow qualifying individuals to pay no UK tax on FIG arising during their first four years of being UK tax resident. This FIG, including non-resident trust distributions, can be brought to the UK free from additional charges.
• After those first four tax years they will be taxed on their worldwide income and gains in the same way as a UK tax resident and domiciled individual.
• Individuals choosing to be taxed under the four-year FIG regime will lose entitlement to personal allowances and the capital gains tax annual exempt amount.
• An individual will be able to choose in each eligible tax year whether they wish to use the FIG regime or be taxed on worldwide income and gains.
  
  

Changes for non-UK resident trusts with UK resident but non-UK domiciled settlors (as announced by the previous Government):

• Currently, unless a Trust is ‘tainted’ a non-UK domiciled settlor is protected from taxation on foreign income and gains as it arises within trust structures even once they have become deemed UK domiciled.  This protection will be removed for such individuals who do not qualify for the 4-year FIG regime, meaning that outside of the FIG regime, the income and gains of settlor-interested trusts will be taxed on the settlor.
• From 6th April 2025, FIG arising in non-resident trust structures will be taxed on the settlor or transferor if they do not qualify for the four-year FIG regime.
• FIG that arose in a trust structure before 6th April 2025 will be taxed on settlors or beneficiaries if they are matched to trust distributions. Settlors and beneficiaries who do not qualify for the four-year FIG regime will be taxed on this matched FIG wherever the distribution is received.
• Settlors and beneficiaries who can use the new four-year FIG regime will be able to receive benefits from a non-UK resident trust free from any UK tax charges, wherever the benefits are received. However, these benefits will not be matched to trust income and gains and will be subject to a modified onwards gift rule.
  
  
  

Planning opportunities:

• Remittance basis users may wish to give thought to whether or not to remit funds to the UK and when would be the most tax efficient time to do this, in light of the transitional provisions.
• Individuals should review the number of years that they have been resident for tax purposes in the UK to determine how they will be taxed from 6th April 2025.

There is still a lack of certainty about many of the proposals, and as a consequence it is very difficult to recommend any changes to persons affected by the above. It is to be hoped that the Budget on 30 October 2024 will provide the clarity that is needed. 

*Please note that these comments are intended as a general summary only and should not be regarded as tax advice. The proposed tax rules may change between now (August 2024) and implementation.

If you have any questions, please get in touch with Rachael Hooper, Senior Manager, Tax,  using her details below.

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        Rachael Hooper

        SENIOR MANAGER, TAX

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