Overview
On 6 March 2024, the UK government announced the planned abolition of the remittance basis of taxation for UK resident non-domiciliaries from 6 April 2025 onwards for foreign income and gains (FIG). This will be replaced with a Foreign Income and Gains regime (the FIG regime / FIG basis of tax), based on statutory residence rather than domicile. A similar shift in respect of UK inheritance tax is also proposed, subject to consultation, to be enforced from 6 April 2025.
In Depth
Full details are yet to be published. For now, the following points and questions arise:
Who is eligible to claim the FIG basis of taxation?
An individual must have been non-UK resident for a period of at least ten years. Upon becoming UK resident, they will have four tax years in which to claim the FIG basis of taxation. This appears to be a fixed period, not cumulative, so that gaps in UK-residence would not extend the window of eligibility.
How are individuals taxed on the FIG regime?
If the FIG basis is claimed, FIG is not subject to UK taxation. Unlike the present remittance basis, it is irrelevant whether FIG remains offshore or is remitted to the UK. Unless the FIG basis is claimed, or when an individual is no longer eligible to claim it, they will be taxed on their global income and gains as they arise. It is not clear how this will interact with FIG realised before 6 April 2025 by a UK resident individual if the individual qualifies to use the FIG in one or more year after 2024/25.
What is the impact on offshore trusts settled by non-domiciliaries?
Since 6 April 2017, the FIG of trusts established by non-UK domiciled settlors was not liable to UK tax unless and until a distribution was made to UK tax residents. This tax treatment will end from 6 April 2025 for FIG arising after that date. FIG of such trusts which arises before 6 April 2025 may remain protected within the trust but is liable to be taxed if matched to distributions to UK resident beneficiaries (even if such distributions occur outside the UK), subject to whether the recipient is a FIG basis taxpayer. With respect to FIG arising on or after 6 April 2025, such trusts will be taxed as if they had been settled by a UK domiciliary (i.e., if they are settlor-interested they will be subject to UK income tax and capital gains tax on an arising basis). Double tax treaties will likely be crucial in this area where the income /gains of the trust are exposed to more than one tax regime due to trustee/settlor/beneficiary residence and/or the source of the income/gains.
What transitional rules will be in place?
These include:
- Temporary Repatriation Facility (TRF) – remittances of historic FIG between 6 April 2025 and 5 April 2027 will be eligible for a reduced rate of tax (12%) where the FIG arose to an individual personally in a year when they were taxed on the current remittance basis of tax. This excludes FIG generated within trusts or similar structures.
- Capital Gains Tax rebasing – this applies to individuals who have claimed the current remittance basis of tax and are neither domiciled nor deemed domiciled in the UK by 5 April 2025. Where they realise a gain on the disposal of a personally held foreign asset on or after 6 April 2025, provided that they have held the asset since 5 April 2019, they can elect to rebase its value as at 5 April 2019.
- For those no longer able to use the remittance basis on 6 April 2025, the first year’s income tax will be cut in half for foreign income (but there is no such relief for capital gains tax).
What changes will be made to inheritance tax?
UK inheritance tax is currently a domicile-based tax. Non-UK domiciled people are only liable to inheritance tax on their UK situate property. UK domiciled people are liable to inheritance tax on their global assets. The UK government has suggested that it wishes to move to a residence-basis for determining inheritance tax, but that non-UK assets held in offshore trusts (so called “excluded property”) before 5 April 2025 may remain outside of the inheritance tax net, provided that they meet the current criteria for excluded property. From 6 April 2025, the treatment of new trusts may depend on whether the settlor at the time the trust is created, or when further assets are settled, meets a ten-year “residence criteria” or is within a further ten-year “tail provision” having ceased UK residence. The proposals for inheritance tax are less detailed and are subject to a consultation.
This is a significant change in UK taxation for those who currently qualify as non-doms and for their associated settlements. With a possible change of UK governing party sometime in 2024, it is possible that these changes may be extended further or adopted wholesale by an incoming new government. Any planning undertaken under the current rules is likely to benefit from review against these proposed changes.
