Non-UK domicile proposals

The changes for non-UK domiciled individuals are set to take effect on 6 April 2025, with the Autumn Budget scheduled for 30 October 2024 to confirm the details. This represents a monumental shift in the UK taxation landscape, marking the most significant overhaul in decades and replacing the current regime and replacing it with a new regime based solely on residence and not domicile.

The new regime – 4-year Foreign Income and Gains

Introduction of the 4-year Foreign Income and Gains (FIG) regime

• This new regime will be available for up to four tax years.
• It applies to new arrivers to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival.
• The new regime offers new arrivers the ability to remit income and gains arising overseas during this period into the UK tax-free.
• This new regime will see the end of the remittance basis of taxation.

Comparison to previous proposals

• Unlike the proposals announced on 6 March 2024 by the previous government, the Labour Government will not introduce a 50% reduction in income tax for foreign income for individuals losing access to the remittance basis in the first year of the new regime.

Transitional rules

Rebasing of foreign assets

• Foreign assets can be rebased to a specific date, which will be confirmed in the Budget. This allows individuals who have claimed the remittance basis before 5 April 2025 to reset the value of their foreign assets for Capital Gains Tax (CGT) purposes, potentially reducing their tax liability on gains accrued before this date.

 Temporary Repatriation Facility

• Starting from 6 April 2025, those individuals who have previously been taxed under the remittance basis and are ineligible for the new regime, the Temporary Repatriation Facility (TRF) will offer a temporary period during which foreign income and gains can be brought to the UK under favourable tax conditions. The exact tax rates and duration of the TRF will be announced in the Budget (the prior proposals included a flat rate of 12%).
• The Government aims to make the TRF as attractive as possible and is exploring its extension to stockpiled income and gains within overseas structures – this is welcome news and we await to see the detail on this.

Inheritance Tax

Proposals for individuals resident in the UK for 10 years

• Inheritance Tax (IHT) is currently a domicile-based system. The Government intends to replace this with a new residence-based system from 6 April 2025. This will affect the scope of property brought into UK IHT for individuals and trusts.
• Once an individual has been UK tax resident for 10 tax years, they will be subject to IHT on their worldwide estates.
• Additionally, they will remain within the scope of UK IHT for 10 years after leaving the UK. This means that even if they become a non-UK resident, their worldwide assets could still be subject to UK IHT for a decade.
• The Government states that these provisions aim to ensure long-term residents contribute their fair share of taxes on their global estates, reducing opportunities for tax avoidance.

Overseas trusts tax proposals

Abolishment of protected trust status

• From 6 April 2025, the protected status of trusts, which currently shelters certain trusts from UK tax liabilities, will be abolished. This means income and gains arising in non-UK resident trusts established by a non-UK domiciled individual could become taxable on UK resident settlors who do not qualify for the 4-year FIG regime.

 End of Excluded Property Trusts

• The use of Excluded Property Trusts, which can keep non-UK situs assets out of the scope of UK IHT, will be terminated. The Government intends to change how IHT is charged on non-UK assets held in such trusts, ensuring all long-term UK residents are subject to the same IHT rules.
• The Government acknowledges that existing trusts have been structured under current rules and is considering transitional arrangements to allow for ‘adjustments’.  What these adjustments will be remains to be seen. However, the Government has made it clear that it aims to ensure fair treatment whilst aligning all long-term residents under the same IHT regulations.

Detailed application and transitional arrangements

• Confirmation of the new rules and their detailed application, including transitional arrangements for affected settlors, will be published in the Budget following external engagement.

Transfer of Assets Abroad provisions

Review and changes

• The Government plans to review the Transfer of Assets Abroad (ToAA) provisions to modernise and clarify the rules. These provisions are aimed at preventing tax avoidance through the transfer of assets abroad. The Government’s intention is to simplify the rules and remove “ambiguity and uncertainty”.
• Any material changes resulting from this review will not come into force until at least 6 April 2026. This delay suggests that the Government will welcome a level of consultation on these rules.

Conclusion

With these comprehensive changes, there is clearly a lot for non-UK domiciles to consider, whether you have existing structures or not. It’s crucial for individuals, trustees, and stakeholders to consult with their advisors to understand the implications of the new rules and plan accordingly.

If you wish to discuss the new rules and their potential implications for you, please don’t hesitate to reach out to Majid Hussain, Partner and Head of Private Client.