The UK regime for Non-UK Domiciled individuals is to be replaced by a new four-year foreign income and gains regime and in addition a consultation is announced to move UK inheritance tax from a domicile basis to a residency basis.
The Chancellor announced in the UK Spring Budget that the current remittance basis of taxation will be abolished for UK resident non-UK domiciled individuals from 6th April 2025 and replaced by a new four-year foreign income and gains (FIG) regime. A consultation will also be launched on changes to the UK inheritance tax regime. The UK government propose to change inheritance tax from a domicile based regime to a residence based regime. These new provisions will also have a consequential effect on Trusts.
The new four-year FIG regime is a more generous and simpler scheme for arrivers in their first few tax years but will undoubtedly be unfavourable to persons who have been UK resident for more than four years. Those latter persons will need to review their circumstances to establish what the impact will be in terms of UK tax payable.
Summary of the new four-year FIG regime from 6th April 2025:
- 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.
- Business Investment Relief will be available for qualifying investments of pre 6th April 2025 FIG made on or after 6th April 2025 and will continue to be available for qualifying investments made prior to 6th April 2025.
Changes for non-UK resident trusts with UK resident but non-UK domiciled settlors:
- 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 four-year FIG regime.
- 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.
Transitional rules:
- Where an individual has been UK resident for less than four years on 6th April 2025 (and prior to that had a period of 10 tax years of non-UK residence) they will be able to use the FIG regime for the remainder of those four years.
- Individuals who are not eligible for the four-year FIG regime, but who would have met the criteria for the old remittance basis regime for the 2025/26 tax year, will pay tax on 50% of their foreign income in 2025/26. This does not apply to foreign chargeable gains, which will be taxed in full.
- Remittance basis users who held a foreign asset personally at 5th April 2019 will be able to elect to rebase that asset to its value as 5th April 2019.
- Individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittances of pre-6th April 2025 FIG in 2025/26 and 2026/27. The mixed fund ordering rules will be relaxed to facilitate this. From 2027-28 remittances of pre-6th April 2025 FIG will be taxed at normal tax rates.
Summary of the proposals for the UK inheritance tax consultation:
- The UK government propose to change the UK inheritance tax rules from a domicile based regime to a residence based regime.
- Once a person has been tax resident in the UK for 10 years they will be charged to UK inheritance tax on personally owned worldwide assets.
- Once they leave the UK they will still be in scope of UK inheritance tax for the following 10 tax years under a ‘’tail’ provision.
- From 6th April 2025, new trust settlements, or additions to existing trusts, of foreign assets made by someone who meets the 10-year residence criteria will no longer be treated as excluded property and will be within the UK inheritance tax net.
- The current inheritance tax treatment will continue for any non-UK property that is settled by a non-UK domiciled (and not deemed domiciled) settlor, and which is settled prior to 6th April 2025.
Planning opportunities:
- Non-UK domiciled, and persons who are not deemed UK domiciled, individuals may wish to settle non-UK property into a Trust up until 5th April 2025, but individuals should be mindful of the trade off of the inheritance tax protection from the Trust versus being taxed on income and gains arising in the Trust.
- 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.
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 (March 2024) and implementation.
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Rachael Hooper
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