In part 2 of our ‘Unlocking the Budget’ series, we set out the new rules that will take effect from 6 April 2025 in relation to non-UK income and gains together with commenting on the new ‘long-term resident’ rules that will apply for Inheritance Tax (‘IHT’).
Reminder: current remittance rules for non-domiciles (“non-doms”)
UK tax resident but non-domiciled taxpayers are, briefly, individuals who have moved to the UK (but for less than 15 out of the previous 20 tax years) without deciding to remain here on a permanent or indefinite basis. These non-doms can elect to pay UK income tax and capital gains tax (“CGT”) only on UK source income and gains. Non-UK income and gains are only subject to UK tax to the extent that they are brought into or enjoyed in the UK (the ‘remittance basis’).
In addition, non-doms only face IHT on UK assets and can secure ongoing tax benefits by establishing 'protected' trusts with offshore assets before they become UK deemed domiciled.
Changes from 6 April 2025
Taxation of income & gains
- A new foreign income and gains (“FIG”) regime will replace the remittance basis. This new regime provides 100% tax relief on most categories of overseas income and chargeable gains and will apply in the first 4 years after acquiring UK residence, where they haven’t been resident in the UK tax purposes for at least the preceding 10 years. This essentially means that the arising basis will apply for new arrivers after 4 tax years compared to the current position of 15 tax years.
- UK resident taxpayers can no longer claim the remittance basis with effect from 6 April 2025. Accordingly, individuals who don’t meet the new FIG criteria will be subject to UK tax on their worldwide income and gains regardless of whether such overseas income/gains are brought to the UK (the ‘arising basis’).
- UK taxpayers who previously claimed the remittance basis will still be subject to tax on remittances of untaxed overseas income and gains (although some may be able to benefit from the Temporary Repatriation Facility discussed below).
- The protected settlement rules for trusts will cease for both new and existing settlor-interested trusts. As a result, settlors (who have been UK resident for at least 4 years), will be taxed on all income and gains arising within the structure unless certain income or capital gains motive defences apply to any underlying companies.
- Overseas Workday Relief (OWR) has been extended from the current first 3 tax years of UK residence to the first 4 tax years, in line with the general new 4-year FIG rules. However, the value of this relief will be capped at 30% of earnings each year, or £300K if lower. Any overseas employment income earned in the first 4 years within these limits will not be subject to UK tax, even if brought to the UK..
Inheritance Tax (IHT)
- IHT will be taxed solely by reference to residence as the concept of domicile will no longer be relevant for tax purposes. In essence, in the first 10 years of residence, only UK assets will be subject to IHT. Thereafter, the individual will become a ‘long-term UK resident’ and their worldwide assets will be within the scope of IHT.
- After a former long-term resident leaves the UK, the worldwide IHT exposure will continue to apply for a number of years (“the tail”). The duration of this tail will vary with the number of years that the individual was UK-resident in the 20 years before departure, with a minimum of 3 years if this was between 10 and 13 years. The tail increases by a year for each additional UK year in the reference period, up to a maximum of 10 years where the individual was resident for all of the last 20 tax years.
- ‘Excluded Property’ Trusts settled before 30 October 2024 will continue to provide protection from IHT for the settlor even if they can benefit from the Trust. This transitional relief also covers the IHT position of the life tenant of a qualifying interest in possession (‘QIIP’) Trust. However, any settlor-interested trusts created after 30 October will be subject to IHT on the settlor’s death based on the new residence tests.
- Non-UK assets in non-QIIP Trusts (including those settled before 30 October 2024) will be within the scope of IHT for the trustees at any point that the settlor qualifies as a long-term resident in the UK, with this status then fixed on the settlor’s death, This may therefore change over time, so leading to an exit charge when assets cease to qualify as ‘relevant property’ on a change in the settlor’s status.
- Non-UK assets in QIIP Trusts settled from 30 October 2024, or where the life tenant acquired their interest after this point, will also be within the scope to IHT at any point that the beneficiary qualifies as a long-term UK resident.
Transitional rules
Temporary Repatriation Facility (“TRF”)
The TRF will be available for the 3 tax years to 5 April 2028. Under this facility individuals can elect for overseas income and gains, which arose under the current remittance basis regime (i.e. potentially up until 5 April 2025), to be taxed at a special rate. These rates are 12% for elections made from 6 April 2025 to 5 April 2027 and 15% from 6 April 2027 to 5 April 2028. These ‘designated’ funds can then be brought to the UK in those 3 years or at any other time without triggering further taxes.
Capital payments from offshore structures made in the TRF period can also be designated so as to benefit from the lower rate of tax if they are matched to pre-2025 income or gains in the structure.
The complex ‘Mixed Fund’ rules are amended to ensure that such designated funds are treated as being remitted before other taxable elements of an account, and the rules are further simplified for relevant accounts during the 3-year TRF period by allowing an annual rather than transaction by transaction basis for each account.
Investments as well as cash deposits can be designated, so that the nominated amount can effectively be converted to clean capital, and even if it is not possible to precisely calculate the taxable element under the current rules.
Rebasing of assets
For CGT purposes there is a limited rebasing opportunity for individuals who were neither UK domiciled nor deemed domiciled before 6 April 2025. Qualifying individuals can elect to rebase certain personally held overseas assets to their market value as at 5 April 2017.
Planning to consider
Based on the draft legislation, some of the aspects that non-doms should be considering now include:
- Affected individuals and trustees may look to change their investment policies to prioritise longer term growth over regular income (subject to wider financial advice). This may include the use of wrappers such as life insurance bonds and offshore non-reporting funds, or more bespoke structures such as investment companies or Authorised Investment Funds.
- Individuals could consider taking dividends from offshore companies before 6 April 2025 which will remain tax-free if the individual can avail of the remittance basis in 2024/25 and the funds are not remitted to the UK. Such funds could also benefit from the lower remittance rates under the TRF.
- Consider taking advantage of the TRF facility by opting to remit untaxed funds after 5 April 2025 rather than before, or conduct a wider review of offshore assets and funds to consider suitable designations to create ‘cleansed’ funds for future use at the 12% TRF rate.
- Settlors of overseas trusts who will be subject to trust income and gains on the arising basis from 6 April 2025 may wish to consider requesting distributions or even winding up trusts prior to 6 April 2025 (or in some cases soon after).
- Settlors may wish to consider excluding themselves (and spouse / civil partner) from future benefit of a trust to ensure that they are not taxed on the trust’s income on the arising basis (the rules attributing gains would likely still apply).
- Affected individuals should assess the impact of the new rules on their likely annual tax exposure. Where this is particularly high and where there is sufficient personal and family mobility, this will inevitably lead some to consider whether they wish to remain UK resident after 5 April 2025. This will require careful consideration of the Statutory Residence Test (SRT) rules, as well as possibly alternative preferential tax regimes in other jurisdictions.
How can we help
If you are concerned about the non-dom changes, or feel that a review of your affairs would be worthwhile, please feel free to get in touch with our Tax Partners Phil Moss (philmoss@lubockfine.co.uk) or David Portman (davidportman@lubbockfine.co.uk) or our Tax Director Aidan Meade (aidanmeade@lubbockfine.co.uk).
