REPLACING NON-UK DOMICILE TAX RULES WITH A RESIDENCE-BASED REGIME FROM 6 APRIL 2025
The present Non-Domicile tax regime has been abolished together with its tax benefits from April 2025.
The new measures replaces the concept of domicile as a relevant connecting factor in the UK tax system with a system based on tax residence. The key features include:
- introducing a new 4-year foreign income and gains regime for new arrivals who have not been UK tax resident in the previous 10 years;
- allowing individuals previously taxed on the remittance basis to remit pre-6 April 2025 foreign income and gains using a new Temporary Repatriation Facility;
- reforming Overseas Workday Relief;
- replacing the domicile-based system for inheritance tax with a residence-based system.
From 6 April 2025, all former remittance basis users who are not eligible for the 4-year FIG regime will pay tax at the same rate as other UK resident individuals on any newly arising foreign income and gains (FIG) like any other taxpayer. Former remittance basis users will continue to pay tax on FIG that arose before 6 April 2025 that they remit to the UK.
The protection from tax on foreign income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year foreign income and gains regime. From 6 April 2025 FIG that arose in protected non-resident trusts before 5 April 2025 will not be taxed unless distributions or benefits are paid or deemed to be paid to UK residents who do not or are unable to make a claim for the 4-year FIG regime. However FIG which arose within the trust structure before this date will be taxed on UK resident settlors or beneficiaries not within the 4-year FIG regime if these are matched to worldwide trust distributions received.
Transitionally, for Capital Gains Tax purposes, current and past remittance basis users will be able to rebase foreign assets they held on 5 April 2017 to their value at that date when they dispose of them.
Individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new 4-year FIG regime will not be able to benefit anymore of the planned 50% tax reduction for foreign income in the first year of the new regime (2025/2026). This announced transitional measure has been removed.
A new Temporary Repatriation Facility (TRF) will be available for individuals who have previously claimed the remittance basis. They will be able to designate and remit at a reduced rate foreign income and gains that arose prior to the changes. This includes unattributed foreign income and gains held within trust structures. The Temporary Repatriation Facility will be available for a limited period of 3 tax years, from 2025 to 2026. The Temporary Repatriation Facility rate will be 12% for the first 2 years (2025/2026 and 2026/2027) and 15% in the final tax year of operation (2027/2028). Any remitted ‘designated amounts’ will not otherwise by charged to UK tax. The TRF will be available provided the individual is UK resident in the relevant tax years.
The TRF will also be available for qualifying UK resident settlors or individuals who receive a benefit from an offshore trust structure during the 3 tax years, from 6 April 2025. To qualify the relevant individual must be a former remittance basis user, the benefit must be received during the TRF period and must be capable of being matched to FIG that arose within the settlement before 6 April 2025. Individuals who make a designation under the TRF and have paid the TRF tax charge will have the freedom to choose in which year to remit the designated amounts to the UK. This does not need to be in the TRF window and could be in a later tax year.
New measure will replace the remittance basis of taxation, which is based on domicile status, with a new tax regime based on residence from 6 April 2025.
The new regime will provide 100% relief on FIG for new arrivals to the UK in their first 4 years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival (4-year Foreign Income and Gains regime).
This includes UK nationals and UK domiciled individuals who may not have previously had access to, or used, the remittance basis.
If an individual had a period of ten consecutive years of non-UK residence prior to their arrival in the UK and is still within their first four years of UK tax residence under the SRT on 6 April 2025, they can access the 4-year FIG regime until they have exceeded the four-year period.
For the new tax regime to apply, a claim needs to be made in the Self-Assessment tax return before the 31st January in the second tax year after the relevant year to which the claim relates, quantifying the amount of income and gains for which relief is being claimed under the regime.
A claim under the 4-year FIG regime will apply regardless of whether any of the amounts subject to the claim (i.e. arising from 6 April 2025 onwards) are remitted to the UK then or later. A claimant can opt to remit any or all their amounts relieved under the 4-year FIG regime, either in the year of the claim or any future year, without any additional UK tax charge and the level of the remittance has no impact on the value that can be claimed.
An individual can make a claim with respect to the 4-year FIG regime for either income or gains, or both. The claim for the 4-year FIG regime applies on a source-by-source basis. It is not necessary to claim relief on all sources of foreign income and foreign gains. As such the taxpayer can choose what foreign income and which foreign gains on which to claim relief. Relief for each source must be identified and claimed on the return.
In addition remittance basis users who leave the UK and return after a period of ten tax years can only claim the 4-year FIG regime for any new FIG that arises within their 4-year FIG regime period. They cannot claim for any FIG they remit during the 4-year FIG regime period that relates to a year in which
they were taxed on the remittance basis. They may, however, be able to use the Temporary Repatriation Facility if their year of return is during the period the TRF is available (see below).
The measure extends the period of Overseas Workday Relief to 4 years to align with the new 4-year foreign income and gains regime. The removal of the remittance basis means it will no longer be necessary to keep part of their employment income offshore and in an offshore bank account to benefit from relief. From 6 April 2025, Overseas Workday Relief will be subject to a financial limit on the amount of relief that can be claimed, this is the lower of £300,000 or 30% of an individual’s total employment income. Employers or their agents will no longer be required to wait for HMRC to approve their application for a direction to operate PAYE on the proportion of an employee’s employment income for work carried out in the UK.
Where employees arrived in the UK and claimed OWR in a tax year prior to 6 April 2025 and are ineligible for the new 4-year FIG regime, they will still be eligible for OWR for their first three years of UK tax residence.
The current domicile-based system of Inheritance Tax will be replaced with a new residence-based system. This will affect the scope of non-UK property brought into UK Inheritance Tax for individuals and trusts. An individual is long-term resident (and in scope for Inheritance Tax on their non-UK assets) when they have been resident in the UK for at least 10 out of the last 20 tax years and then remain in scope for between 3 and 10 years after leaving the UK (the time the individual remains in scope after leaving the UK will be shortened where they have only been resident in the UK for between 10 and 19 years). Subject to transitional points, any non-UK assets a person put into a Trust will be subject to Inheritance Tax charges at times when the settlor is long-term resident (trustees will pay tax on non-UK assets settled by an individual while they are a long-term resident). The test for whether non-UK assets are in scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. The excluded property status of non-UK settled assets will not be fixed at the time the assets are added to a settlement. Instead, they will only be excluded property (and so not subject to IHT charges) at times when the settlor is not long-term resident. When a settlor is long-term resident, any assets they have settled (even when not long-term resident) will be subject to IHT.
For further information and advice, please contact us at info@veragroupltd.com or call 0207 4346000