On Wednesday, the Chancellor announced a proposed abolition to the UK tax system that applies to UK resident non-domiciled individuals, with the changes set to come into force from 6 April 2025.
The Key Proposals
New Arrivers
From 6 April 2025, the UK will abolish the current remittance basis of taxation for UK resident, non-domiciled individuals. In its place, there will be a new four-year foreign income and gains (FIG) regime which will be implemented for those becoming UK tax resident (to be determined by the Statutory Residence test) following 10 years of non-UK residence.
For those eligible individuals, they will be able to make a claim to not pay UK tax on their FIG in their first four years of UK residence, which will include distributions from offshore trusts.
Surprisingly, these proposals appear to apply to even UK domiciled individuals who have spent 10 tax years outside of the UK. The one downside to electing for this regime is the forfeiting of personal allowances and capital gains tax exemptions.
Existing UK residence but not domiciled individuals
For individuals transitioning from the remittance basis of taxation to the arising basis in April 2025, a number of rules will apply including:
- a one-time tax reduction of 50% on foreign income (not on gains) will be in place for the 2025/26 tax year;
- a Temporary Repatriation Facility (TRF) levies a 12% tax rate on remittances of pre-6 April 2025 FIG for the tax years 2025/26 and 2026/27;
- allowing certain individuals to rebase assets held personally at 5 April 2019 for capital gains tax purposes; and
- business investment relief will continue to apply to pre-6 April 2025 income.
Trust Taxation
From 6 April 2025, protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the new FIG regime.
FIG arising in trusts from 6 April 2025, will be taxed on the settlor on the same basis as UK domiciled settlors, unless eligible for the new FIG regime.
Pre-6 April 2025 FIG matched to trust distributions will continue to be taxed on settlors or beneficiaries. Trust beneficiaries and settlors within the four year FIG regime will receive benefits from 6 April 2025, free from UK tax, though these benefits are not matched to trust income and gains and are subject to a modified onwards gift rule.
Inheritance Tax
The inheritance tax system is also planned to shift from domicile-based to residence-based from 6 April 2025, pending consultation covering various issues, including transitional provisions and connecting factors.
However, the proposal suggests that IHT would apply to worldwide assets after 10 years of UK residence. It also seems to suggest that this exposure to IHT can be lost after 10 years of non-UK tax residence.
Of particular note is the proposal that any trusts created by non-doms before 6 April 2025 will have excluded property status for IHT purposes.
Please note that the above does not constitute legal advice.
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