Under current rules, non-UK domiciled tax resident individuals (i.e., those that were broadly not born here) are subject to a special set of tax rules, which can mean they are not required to pay UK tax as UK domiciled individuals would.
For income tax and capital gains tax purposes, those individuals have the choice to be taxed on what is called the arising basis or the remittance basis, where the UK tax liability is limited to UK source income and gains and foreign income and gains “remitted” to the UK.
For those individuals that are long term remittance basis users, charges arise (starting from £30,000) to effectively preserve their right to use the remittance basis.
This has long been the focus of debate and the Government had committed that each long-term resident should pay their fair share of UK tax.
From 6 April 2025, the existing non-domicile tax regime will be abolished, and a new residence-based system will be introduced. Labour says that is aimed to attract the best talent and investment in the UK.
The summarised changes are as follows:
- Implementation of a 4-year foreign income and gains regime, which if claimed, means that a taxpayer would not pay UK income tax or capital gains tax on qualifying income or gains for the first four years if they arrive in the UK on or after 6 April 2025.
- Replacing the domicile-based system for Inheritance tax with a residence-based system so that an individual’s exposure to UK inheritance tax is limited to UK assets once they have been non-UK tax resident for 10 consecutive tax years.
- Introduction of a Temporary Repatriation Facility (TRF) – allowing individuals to bring funds to the UK that have previously been subject to a remittance basis claim at a preferential rate of tax for three years starting from 6 April 2025.
- Changes to overseas workday relief so that qualifying individuals with income relating to overseas workdays do not have to keep the income relating to those overseas workdays offshore. The plans also extend the timeframe for a claim from three to four years so that people have access to the dispensation for longer.
- Current and past remittance basis users will be able to rebase their personally held assets to 5 April 2017 where certain conditions are met so that their base costs on a future disposal are uplifted to their market value at that date.
Introduction to the 4 Year 100% Relief for Income and Capital Gains Tax
From 6 April 2025, 100% income and capital gains tax relief will be available on foreign income and gains (FIGS) for all new arrivals to the UK in their first four years of tax residence (under the UK Statutory Residence Test only).
It is worth noting that this is only available to individuals that have not been tax resident in the 10 tax years immediately before their arrival and where someone came to the UK during the 2023/24 UK tax year, becoming UK tax resident at that point, they would still be entitled to relief under the new rules for the next two UK tax years.
Guidance states that a claim will be required on the individual’s tax return and that a blanket approach will not be acceptable, with the taxpayer being required to quantify the amount of income and gains that relief is being claimed on.
For those that have been a UK tax resident in one or more of the preceding ten UK tax years, along with those individuals previously claiming the remittance basis on a long-term basis, will be taxed on the income and gains based on their marginal rate of tax when filing their UK tax return.
It is worth noting that those individuals that have previously claimed the remittance basis, before 6 April 2025, will continue to pay tax on their foreign income and gains that they remit to the UK from those earlier years, subject to the new Temporary Repatriation Facility.
Under the new rules, a taxpayer will be able to claim for relief on a source-by-source basis and the taxpayer can choose where relief is claimed. Like under the old rules, the personal allowance and capital gains tax exemption will be withdrawn where a claim for relief is made.
In reality, the changes here still raise the same question, should I claim or not?
As an example, an individual may have foreign and UK income totalling £110,000 with a large amount of foreign tax suffered abroad on their overseas income. In this instance, the individual would need to consider whether to claim the relief or not, as if the relief is not claimed they would still have their partial UK personal allowance and be able to make a claim for double tax relief on their UK tax return.
Temporary Repatriation Facility (TRF)
An interesting and potentially beneficial change, both for HMRC and the taxpayer is the introduction of the TRF. For those individuals that have previously claimed the remittance basis that have funds sat in overseas accounts, there is now an option to simplify your affairs.
From 6 April 2025, there will be a three-year window where this money can be brought to the UK, bringing with it a preferential rate of tax. The rate will be 12% for the UK tax years ending 5 April 2026 and 2027, rising to 15% in the final tax year of the window, the UK tax year ending 5 April 2028. It is worth noting that these funds do not need to be immediately brought to the UK and can be drip fed over time. It does however make tracking and bank structure just as important as it was under the “old rules”. HMRC guidance also highlights that no relief would be able to offset the remittance basis charges from the TRF charge.
The benefit of this arrangement for the taxpayer would be that regardless of your other sources of income, you will just pay the tax charge at a flat rate. It is worth noting that you would not be able to claim double tax relief under this facility and the flat rate charge would be levied on the net amount received, after deduction of the foreign tax credit.
It would therefore be important to consider whether paying tax, considering double tax relief, on a remittance of this income would be beneficial.
The Mixed Fund Issue
From 6 April 2025, where the TRF is used, the designated amount will be treated as remitted to the UK in priority to other amounts in a mixed fund.
Under the new rules, it will make analysing mixed funds easier in that HMRC will allow an annualised approach as opposed to the current transaction by transaction approach.
Interaction between the old and new rules
Consideration will still need to be made around bank accounts and making sure that income and gains derived post 6 April 2025 are kept separate from that earned or derived up to that point.
From 6 April 2025, where the new 4-year foreign income and gains transitional rules apply, those funds can be brought to the UK at any time. This will therefore need careful thought in terms of setting up new bank accounts, particularly if a taxpayer does not need the previously elected remittance basis funds in the UK and does not wish to use the TRF.
Extension of Overseas Workday Relief
This relief is available, subject to a claim, where a qualifying UK tax resident individual performs work outside of the UK in an employment which is wholly or partly performed outside of the UK.
Under the old rules, relief was available for a three-year period where the funds relating to the work performed overseas were kept out of the UK. IE, it wasn’t subject to UK tax, however, tracking these funds could prove problematic.
The new rules do cap the maximum amount of relief to the lower of 30% of qualifying employment income or £300,000 a tax year, however, one big advantage to the claimant is that the income qualifying for overseas workday relief does not need to be kept offshore. The relief is further extended from three years to four.
The wider impact for these rules from a PAYE perspective could also benefit other individuals. Under overseas workday relief, it is possible to obtain a dispensation called a s.690 agreement, where only a proportion of the salary was subject to UK income tax, agreed in advance by HMRC.
Changes being brought in from 6 April 2025 allow an employer to notify HMRC of their intention to operate PAYE on a proportion of an employee’s earnings, being able to do so from they receive “auto-acknowledgement” from HMRC. This is a significant change in approach from the lengthy delay in getting a written approval from HMRC.
Where now with Inheritance Tax
As it stands at present, individuals considered domiciled or deemed domiciles under the current non-doms rules in the UK are liable to UK inheritance tax on their worldwide estate. As expected, from 6 April 2025, UK assets will remain in the scope of UK inheritance tax regardless of residence status.
The changes ultimately mean that those long term, UK national, non-UK residents could benefit from a reduction in their estate liable to UK inheritance tax as they will no longer be subject to inheritance tax on their worldwide estate if they are not UK tax resident.
The key test for non-UK assets being subject to UK inheritance tax will be if an individual has been resident in the UK for tax purposes for at least 10 out of the last 20 tax years immediately preceding the tax year in which they die. With concessions in place where individuals have only been UK tax resident between 10 and 19 years.
One potential issue this creates is on a previously made spousal election, where the spouse who was previously non-UK domiciled, has elected to be UK domiciled for inheritance tax purposes to benefit from the interspousal transfer for UK inheritance tax purposes, so that the transfer on death is not limited to £325,000.
From 6 April 2025, the rules will be amended so that the spouse or civil partner of a long-term resident can elect to be treated as though they were themselves a long-term non-UK tax resident, with their exposure to UK inheritance tax limited to UK assets.
For those individuals that wish to make a domicile election before 6 April 2025, it will be possible to do so but it will mean that they are deemed domiciled in the UK up to 6 April 2025 until they have spent sufficient time outside the UK as a non-UK tax resident.
For those that have already made elections, the new rules will automatically apply from 6 April 2025, until 4 consecutive tax years of non-residence have elapsed. In this instance the 10-year rule will not apply.
So what do these new rules mean for me?
In practice, the same questions and issues will continue to arise:
- Should a claim be made.
- What is more beneficial.
- What am I bringing to the UK and is it from the correct account.
The short answer is as always, it depends.
From an income tax perspective, a lot more reliance will be given to interpreting tax treaties to ensure that the correct amount of tax is paid and in the correct place and which reliefs should be claimed.
Regarding inheritance tax, a big advantage could be obtained by individuals breaking UK tax residence and moving to a country where there is either lower inheritance tax rates.
BHP have a designated team available to discuss your circumstances with you and advise you on the appropriate action to take.
