UK: Sea-change For 'Non-doms' As Remittance Basis Taxation Scrapped From 2025

New Regime

Under the current remittance basis regime, non-UK domiciliaries can shelter their foreign income and gains (FIGs) from UK income and capital gains tax, provided that they do not ‘remit’ them to the UK. Broadly, once a UK tax resident for more than 15 years, they are no longer eligible for the remittance basis, and must pay UK tax on FIGs on the arising basis.

Under the new four-year FIG regime, taxpayers will be able to limit their UK income tax and CGT exposure on FIGs for a four-year period after becoming UK tax resident and, in marked contrast to the current rules, bring FIGs to the UK without a UK tax charge. It is hoped this will act as a shot in the arm for investment into the UK. However, after the four-year period, the taxpayer will pay UK tax on worldwide income and gains on the arising basis, ie in the same way that UK domiciliaries are taxed.

To benefit, taxpayers must have 10 years of non-UK tax residence which precedes the four-year period.

Taxpayers can pick and choose particular years within the four-year period for which they wish to claim the benefit. However, the four-year UK residency period is not cumulative so, for example, if a taxpayer leaves the UK in year 2 and returns in year 5, the option to elect into the four-year FIG regime is lost. For these purposes, the UK’s statutory residency test will determine tax residence for any one UK tax year and treaty residence and split years will be ignored. 

As is currently the case with the remittance basis, electing into the 4-year FIG regime for a particular tax year will mean losing the income tax personal allowance and capital gains annual exempt amount.

The remittance basis will not become completely irrelevant from April 2025 as former remittance basis taxpayers will continue to be taxed in respect of remittances of their FIGs relating to prior years. However, such remittances will be taxed in a different way under the “Temporary Repatriation Facility” (one of the transitional provisions noted below).

US Citizens

This new regime should simplify matters somewhat for US citizens in their first four years of UK residency as it does away with the double tax risk and administrative complexity associated with US citizens claiming the remittance basis.

Trusts

Since 2017, non-UK domiciliaries who establish non-UK trusts before they become UK deemed domiciled (through long-term UK residency) benefit from a ‘protected settlement’ regime: the settlor is sheltered from UK tax on income and gains arising within the trust structure, even after they become UK deemed domiciled. Instead, UK resident beneficiaries of the trust are subject to UK tax, where they receive benefits in the UK from the trust which are “matched” with income or gains within the trust structure.

These rules are to be reformed in a fashion which will have a radical impact for long-term UK resident non-UK domiciliaries who created such settlements. Under the new rules, a UK resident settlor who is outside the scope of the four-year FIG regime will be taxed on the trust's income and gains on an arising basis, with no protection, making the treatment consistent with that of UK domiciled settlors.  

These rules will apply to trusts in which the settlor retains an interest. However, given the broad definition of ‘settlor-interested’, the new rules are likely to apply to most non-UK trusts. Taxpayers in scope of the four-year FIG regime will not be subject to UK tax on distributions from offshore trusts, wherever the distribution is received. However, a new ‘onward gifting rule’ will apply to prevent indirect distributions to taxpayers who are outside the scope of the four-year FIG regime escaping a UK tax charge.

Non-UK profits of settlements arising between April 2017 and April 2025 will not be brought into the new charge retrospectively but from 6 April 2025 such profits will be matched to trust distributions and UK resident non-domiciled individuals will no longer be entitled to the remittance basis in respect of such trust distributions.

Transitional Provisions

Given the new rules represent something of a seismic shock for current remittance basis users who are already past their first four years of UK residency, a number of transitional arrangements are being made available:

One-year 50 Per Cent Reduction To Tax On Foreign Income

For the 2025-26 tax year only, there will be a 50 per cent reduction on foreign income that will be subject to tax for individuals who move from the remittance basis to the arising basis from 6 April 2025. This reduction will not apply to foreign gains.

Two-year Temporary Repatriation Facility (TRF)
During a two-year window (UK tax years 2025-26 and 2026-27), previous users of the remittance basis of taxation will be able to remit FIGs which arose before 6 April 2025 to the UK at a reduced tax rate of 12 per cent.

Remittances made in subsequent years of such FIGs will be taxed at the usual rates. There will be some relaxation of the mixed fund ordering rules to make it easier for individuals to take advantage of the TRF if, for example, they have FIG in a mixed fund or they are unable to precisely identify the quantum of their FIG. The TRF will not, however, apply to income and gains matched with benefits received from offshore trusts. (The UK Government expects the TRF to bring an additional £15 billion of FIGs to the UK and raise over £1 billion in additional tax receipts).

Rebasing

From 6 April 2025, an individual who is not, or who later ceases to be, eligible for the new four-year FIG regime will be taxed on foreign gains in the normal way. However, individuals who were remittance basis taxpayers (and are neither UK domiciled nor deemed domiciled by 6 April 2025) will be able to elect to rebase assets held personally to their value at 5 April 2019 in respect of disposals on or after 6 April 2025. As yet, there are no further details on the conditions to be met to achieve this rebasing.

Inheritance Tax (IHT)

In addition to the reforms to the taxation of FIGs, the UK Chancellor announced an intention to move IHT from a domicile-based system to a residence-based system from 6 April 2025, subject to consultation.

Personally-owned Assets

The current IHT treatment of personally-owned assets is determined by the ‘IHT situs’ of the assets, and whether the relevant individual is UK domiciled under English common law or deemed domiciled in the UK for UK tax purposes. A UK domiciled or UK deemed domiciled individual is subject to IHT on their worldwide assets; whereas an individual who is neither UK domiciled nor deemed domiciled in the UK for UK tax purposes is only subject to IHT in respect of assets situated in the UK for IHT purposes.

The new rules from 6 April 2025 anticipate charging IHT on worldwide assets owned outright when a person has been resident in the UK for 10 years. In addition, a 10-year ‘IHT tail’ on leaving the UK is suggested. However, where the new IHT regime ends up will depend on a consultation this year and it is possible that connecting factors other than UK residency will become relevant. That said, it appears that UK situs assets will remain in charge on the same basis as at present, regardless of residence.

Trust Property

The current IHT treatment of trust property is determined, in broad terms, by the 'IHT situs' of the assets at the date of the tax charge and the domicile status of the settlor when assets are transferred to the trust. Worldwide assets settled by a UK domiciled or UK deemed domiciled settlor are subject to an upfront IHT charge; whereas assets which are situated outside the UK (for IHT purposes) can be settled on trust by a non-UK domiciliary and potentially remain permanently outside the scope of IHT (an 'excluded property' trust), even if the settlor subsequently becomes UK deemed domiciled through long-term residency.

From 6 April 2025, the new proposals lack detail but contemplate that the IHT treatment of trust property will depend on whether a settlor meets the 10-years of UK residence condition or is still within the 10-year IHT tail period.  This is a complex area to reform and a detailed working of the rules (including consideration of further criteria such as other connecting factors) is subject to consultation. However, again, UK situs assets will remain in charge on the same basis as at present, regardless of residence.  

Notably, the current favourable ‘excluded property’ IHT treatment will continue for any non-UK property that is settled by a non-UK domiciled settlor prior to 6 April 2025. However, new trusts and additions to existing trusts made by non-UK domiciled settlors on or after 6 April 2025 will be subject to new residence-based rules.

Furthermore, existing rules will remain in place that mean excluded trust property will not suffer IHT on a settlor’s death even where they retain a benefit in the trust assets.  

How Should Non-doms Be Reacting?

With many months to go before the legislation takes effect, it makes sense to wait until the draft legislation has been published later this year so that it can be fully considered before any implementation occurs. That said, some of the planning to be explored with specialist advisers over the coming months may include:

• Deferral of remittances of pre-April 2025 FIGs until after 5 April 2025 (but before 6 April 2027) to secure the 12 per cent rate under the TRF.
• Exploring scope to amend the terms of protected settlements to exclude certain persons from benefitting to avoid the settlor becoming taxed on FIGs arising in the settlements.
• Establishing an 'excluded property' trust before 6 April 2025 to keep non-UK assets outside the scope of IHT (although such trusts will be transparent as to the settlor for income tax and CGT).
• Acceleration of disposals to realise latent gains before 5 April 2025, for example by current remittance basis taxpayers who will be outside the scope of the four-year FIG regime on 6 April 2025.

What Next?

The announcement by the UK Chancellor represents a sea-change in the tax treatment of the UK’s non-dom population. We await the draft legislation and further detail, particularly on the IHT reforms and transitional provisions. Furthermore, a UK general election will take place before these new rules are due to come into effect and further changes to these rules are possible especially in the event of a change in government. That said, it is expected that as the main income tax and CGT changes could well be legislated for before the general election, there is a good chance that they will persist through 6 April 2025 irrespective of which party is in power at that time. 

Matthew Radcliffe TEP
Matthew provides advice to offshore, onshore and multi-jurisdictional individuals, families, trustees and beneficiaries regarding taxation, trust and estate planning matters. He is familiar with devising and coordinating tax and estate planning across a number of jurisdictions and in particular specialises in tax and estate planning where there are US, UK and Canada cross-border issues. He also has expertise in advising on the UK tax treatment of foreign entities including foundations and trusts and UK residential property holding structures.