The Autumn Budget, 30 October 2024, confirmed that changes announced in the Spring Budget 2024 will go ahead with regards to the non-UK domicile tax rules being replaced with a residence-based regime from 6 April 2025, albeit with some changes. The remittance basis of taxation will be abolished for UK resident non-domiciled individuals, therefore the last year for which a remittance basis claim can be made will be the 2024/25 tax year.
Domicile is a legal concept, distinct from residency, defining the country that a person treats as their permanent home, where their family and economic ties are and where they intend to return to. It is only possible to have one domicile at any one time. Everyone has a domicile at birth based on their father’s domicile when born and this can then change due to choice when settled in a new country.
Residency in the UK is determined by the amount of time a person spends in the UK in a given tax year and specific connections they have with the UK under the UK Statutory Residence Test (SRT).
From 6 April 2025 anyone who has been tax resident in the UK for more than four years will pay UK tax on their worldwide income and gains, regardless of domicile, as is the case for other UK residents.
Under the new regime, individuals will not pay UK tax on any foreign income and gains arising in their first four years of UK tax residence, provided they have been non-tax resident in the 10 consecutive years prior to their arrival. This is being called the 4-year Foreign Income and Gains (FIG) regime.
To claim the 4-year FIG regime, individuals will need to quantify the amount of income and gains for which relief is being claimed under the regime and include this in their Self Assessment tax return. If amounts are not quantified and included in the return, then these amounts will remain chargeable and subject to tax. This is different to the remittance basis regime, where unremitted foreign income and gains did not need to be included on the tax return. A claim under the 4-year FIG regime will apply regardless of whether any of the amounts subject to the claim are remitted to the UK or not. Individuals can opt to remit any or all 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.
Individuals claiming the FIG regime will lose their entitlement to the personal allowance and the capital gains tax annual exempt amount. A claim will need to be made each year for it to apply and can be made one year and not the next. An individual can make a claim with respect to the 4-year FIG regime for foreign income, foreign gains or both foreign income and foreign gains. The claims are separate, however the loss of entitlement to both personal allowance and annual exempt amount will apply regardless of whether a claim is made for only income only gains or both.
Most common types of foreign income and gains can be relieved from tax as part of the new 4-year FIG regime. However, not all foreign income is relievable under the regime, so it is key to get advice.
A new Temporary Repatriation Facility (TRF) will be available for individuals who have previously claimed the remittance basis. Individuals will be able to designate and remit, at a reduced rate, foreign income and gains that arose prior to the changes. Once a designation has been made, no further UK tax will be payable, regardless of the tax year of remittance. There is no requirement for amounts to be remitted during the tax year in which designated or in any later tax year. The TRF will be available for a limited period of 3 tax years and the tax rate will be 12% for the first 2 years (2025/26 and 2026/27) and 15% in the final tax year (2027/28) of operation. Unlike 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.
Transitional rules will apply for individuals who have claimed the remittance basis, on a disposal of an asset held personally as at 5 April 2017, to be able to elect to rebase that asset to its value as at that date provided certain conditions are met.
Overseas Workday Relief (OWR) will be reformed with eligibility for the relief based on the new 4-year FIG regime. OWR will continue to provide income tax relief on earnings from employment duties performed outside of the UK for the first four years of tax residence with restrictions on remitting these earnings removed. From 6 April 2025, OWR will be subject to a financial limit on the amount of relief that can be claimed per tax year, this is the lower of £300,000 or 30% of an individual’s total qualifying employment income.
The current domicile-based system of inheritance tax will also be replaced with a new residence-based system. This will affect the scope of overseas assets brought into UK inheritance tax. An individual is long-term resident (and in scope for UK inheritance tax on their worldwide 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. Subject to transitional points, any non-UK assets a person put into a settlement will be subject to inheritance tax charges at times when the settlor is long-term resident.
For further information or to arrange a consultation, please contact Emily Hillier, Director of Tax Advisory Services, at ehillier@wenntownsend.co.uk or call 01865 559900.