Following a highly anticipated Budget, we now have some clarity, in the form of draft legislation and a lengthy 34-page technical note, on the promised reform to the tax regime for non-domiciled individuals, making good on the government’s commitment to “addressing unfairness in the tax system”.
Below, we’ve explored how the changes will impact income tax and capital gains tax (CGT), with part two, a focus on the IHT changes coming soon.
WHAT’S CHANGING?
For over a century the concept of domicile has played an important part in UK tax legislation, determining the scope of UK taxation on individuals for whom the UK is not their permanent home. Draft legislation has now been published to abolish the current regime and the domicile of an individual will no longer impact how they are taxed in the UK.
From an income tax and CGT perspective, this means that the ability to claim the remittance basis of taxation, broadly for the first 15 tax years of residence, will come to an end from 6 April 2025. Individuals who remit income and gains which were the subject of a historical remittance basis claim will continue to be taxed in the year of remittance under the current rules.
THE FOUR-YEAR FIG REGIME
A new regime will be available to individuals who become UK resident following a period of 10 consecutive years of non-residence. This will allow qualifying individuals to claim relief from UK tax on their foreign income and gains (FIG) in the first four years of their UK tax residence whether or not they bring those FIG into the UK, which is a move away from the current remittance basis rules.
The new regime applies equally to UK nationals/UK domiciled individuals who are returning to the UK following a period of non-residence which spans at least 10 consecutive tax years.
Any individuals who have been resident in the UK for less than four years (following 10 consecutive years of non-residence) will be able to make use of the regime for any tax years which remain within their initial four-year period of residence.
The four-year FIG regime is available for a maximum period of four consecutive tax years. If an individual loses their UK residence status during that four-year period, they may still be eligible to make a claim if they return to the UK within the period. An arrival or indeed a return to the UK should therefore be planned with some care in terms of which tax year is the best year to commence that four year-period. It is also important to note that split years and years where an individual is considered non-resident under the terms of a double taxation treaty will count as a year of residence for the purpose of counting years of UK residence.
Qualifying individuals will need to make a claim in order to benefit from the relief and this should be included within a Self-Assessment tax return. The claim must be made before 31 January in the second tax year after the relevant year to which the claim relates. For example, a claim for the four-year FIG regime for the 2025/26 tax year will need to be made on or before 31 January 2028. It’s vitally important for individuals coming to the UK not to assume that this relief is automatic. Failure to make a correct claim by the deadline could result in a failure to benefit from the relief.
With similarities to the current remittance basis regime, to benefit from the relief taxpayers must forego their personal allowance and capital gains tax annual exemption, making it necessary to undertake a review to ensure that claiming the relief results in the most beneficial tax outcome.
This review should consider any allowable foreign tax credits, exemptions or reliefs afforded by double taxation treaties and bear in mind that certain types of income are excluded from the regime. This includes, amongst others, payments from certain pension schemes and chargeable event gains arising on offshore life insurance policies.
THE FOUR-YEAR FIG REGIME & OFFSHORE TRUSTS
The protection from tax on FIG arising within settlor-interested trust structures will no longer be available for settlors who are resident in the UK, unless they qualify for and claim the four-year FIG regime. FIG arising in the trust (whenever established) from 6 April 2025 will be taxed on the settlor on an arising basis unless the settlor is eligible for and claims the four-year FIG regime.
From 6 April 2025, the matching of any pre-6 April 2025 FIG to trust distributions will be taxable on UK resident individuals who are not eligible for and claiming for the four-year FIG regime.
Beneficiaries and settlors who are within the four-year FIG regime will also be able to receive benefits free from any UK tax charges whether or not the benefits are received in the UK. However, such benefits will not reduce the pools of unmatched FIG within the overseas entity for matching purposes and will be subject to a modified onwards gift rule and close family member rule.
OVERSEAS WORKDAY RELIEF
Overseas workday relief (OWR) will continue, with eligibility broadly based on that set out above for the four-year FIG regime, which provides a one-year extension to the current relief. As with the FIG regime, OWR will also become available to UK nationals who are returning to the UK following a period of non-residence which spans at least 10 consecutive tax years.
From 6 April 2025, OWR will be available in respect of income which relates to overseas duties regardless of whether those earnings are brought to the UK, which will simplify the practicalities of the relief for those wishing to make use of it. The extent to which earnings relate to overseas duties will continue to be determined on a just and reasonable basis. Usually, this would be on a workday basis, where earnings are apportioned based on the number of workdays performed in the UK versus overseas.
The relief will be subject to an annual limit for each qualifying year, being the lower of 30% of the qualifying employment income or £300,000 per tax year. For this purpose, qualifying employment income is the total earnings for a tax year arising from an employment which is wholly or partly performed outside the UK.
OWR TRANSITIONAL ARRANGEMENTS
Individuals who arrived in the UK and claimed OWR in a tax year prior to 6 April 2025 but who are ineligible for the new 4-year FIG regime, (for example, because they were not non-UK tax resident for 10 consecutive tax years before arriving in the UK) may continue to claim OWR for their first three tax years of UK residence. Individuals that are part way through an existing OWR three-year claim on 6 April 2025 and are eligible for the 4-year FIG regime can benefit from OWR for a total of four years of UK residence.
Individuals who are part way through their OWR period on 6 April 2025, under either of the above scenarios, will not be subject to the financial limits set out above.
Transitional rules also apply to individuals receiving ‘trailing income’, being income received in a tax year which relates to duties performed in an earlier tax year (for example, a performance bonus). Where such income relates to a period that is pre-6 April 2025 but is received afterwards, it will be treated under the pre-6 April 2025 OWR rules and, to the extent it relates to duties performed outside the UK, will continue to be taxable upon remittance.
This means that any income relating to pre-6 April 2025 will need to be paid into a qualifying overseas bank account and be kept offshore to benefit from OWR under the current rules.
TEMPORARY REPATRIATION FACILITY (TRF)
There will be a temporary repatriation facility for individuals who have previously claimed the remittance basis. This will enable them to designate and remit foreign income and gains, which had been subject to those prior claims, at a lower rate of taxation. The facility will run for three years from 6 April 2025 with the tax rate being set initially at 12% until 6 April 2027 when it will increase to 15%.
Details of amounts designated will need to be included on tax returns. These amounts can then be remitted to the UK at any time without further tax and without any further reporting being required to HMRC.
Amongst the detail, HMRC’s technical note suggests that it will be possible to designate amounts of an uncertain origin or where the individual no longer has records to confirm the original source of the funds, as well as making a partial designation for a mixed fund account. Designated amounts will then leave mixed fund accounts first, but offshore transfers could impact the position as their rules remain largely unchanged except for the addition of provisions related to a “designated account”.
It should also be noted that, unlike the current remittance basis charge payments, where a TRF charge is paid out of undesignated FIG, this will constitute a taxable remittance, even where the payment is made direct to HMRC by cheque or electronic transfer.
The facility can also apply to individuals who have received or been attributed FIG from offshore trusts or entities in respect of which the remittance basis has been previously claimed.
REBASING FOR CGT
Current and past remittance basis users will be able to rebase foreign assets they held on 5 April 2017 to their market value at that date, providing the following conditions are met:
- The individual must not have been UK domiciled or deemed UK domiciled at any time before tax year 2025/26.
- They must have made a remittance basis claim for any one of the tax years from 2017/18 to 2024/25. This does not include years where the person has automatic use of the remittance basis without a claim being required because the amount of their unremitted FIG for the tax year is under £2,000 or their UK income and gains is limited.
- They must hold the relevant asset on 5 April 2017 and dispose of it on or after 6 April 2025.
- The asset must have been situated outside the UK from 6 March 2024 to 5 April 2025.
GOT QUESTIONS ABOUT THE CHANGES?
The rules for non-domiciled individuals have always been complex and fraught with practical difficulties. Whilst it would seem the new rules bring simplicity for individuals entering the UK for the first time in the future, this is not the case for those who have made use, in the past, of the tax advantageous regimes available to non-domiciled individuals living in the UK.
The availability, from 6 April 2025, of the new four-year FIG regime and overseas workday relief for individuals who are UK nationals should not be overlooked as a significant new relief available to them on a return, temporary or not, to the UK, so long as their non-residence has spanned ten consecutive tax years. The timing of a return to the UK could be key to the relief being available or not.
Whether you are soon to arrive or return to the UK or a long-term resident with a non-UK domicile status, it’s important to understand the changes and how they apply to you, and any associated structures, to enable informed decisions to be made.
If you have any questions about the changes and how they impact your position, reach out to myself or another member of the Cooper Parry private client team, and we’ll be happy to help.
