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As expected, the 2024 Budget included details of the Government’s plans to abolish the special status awarded to UK resident non-domiciled individuals (non-doms) from 6 April 2025. The remittance basis regime is to be replaced with a residence-based test. This includes a new four-year foreign income and gains (FIG) regime and a ten out of twenty years residence regime for inheritance tax on non-UK assets.
This article explains some key aspects of these new rules and what individuals can expect in the future. We highlight the new transitional rules, what is happening with IHT and the future treatment of assets within a trust.
1. Four-year FIG regime
The new four-year FIG regime comes into operation on 6 April 2025. It is a residence-based test that will start either from this effective date or, if earlier, from the date on which the individual became UK resident.
It is available for four years and any individual who has been non-UK resident for at least the previous ten tax years will be eligible for the regime.
Any individual who has been tax resident in the UK for less than four tax years by 6 April 2025 can still use the FIG regime for the remainder of their four-year term.
The four-year FIG regime will also be available to former UK residents who have been non-UK resident for ten years or more.
During the four years when the FIG scheme applies, newly arrived individuals in the UK will not be taxed on either their foreign income and gains, or on any distributions from non-resident trusts. All of these can be brought into the UK freely without attracting a tax charge.
After the four-year period expires, individuals will be taxed on all their worldwide income and gains, in accordance with the normal tax rules for UK residents.
For an individual to be eligible, they must make a claim by 31 January of the second tax year following the relevant tax year, and all sources of FIG (foreign income and gains) that are to be covered by the regime must be declared. Individual claims will be needed for income and gains.
Note that individuals must choose between the FIG regime and the normal UK tax rules. Once a claim is made for either income, gains, or both to be opted into the four-year FIG regime, any entitlement to income tax personal allowances and annual exempt amounts for capital gains tax will be lost.
2. Temporary Repatriation Facility (TRF)
The four-year FIG regime is designed primarily for new non-doms. There are transitional provisions being implemented for existing non-doms. This is the TRF (temporary repatriation facility).
According to the rules of TRF, a UK resident individual who was previously claiming the remittance basis and who has unremitted FIG arising before 6 April 2025, can choose to be treated within the FIG rules. They will then pay tax at a reduced rate on any FIG they bring into the UK.
The rate of tax for TRF is 12% for the tax years 2025/26 and 2026/27. It will increase to 15% for the tax year 2027/28.
Physically moving the funds into the UK during this period is not necessary, it is simply necessary to elect and pay the tax.
TRF can also apply to unremitted FIG invested in assets. Individuals are advised to maintain very accurate records of all assets to comply with HMRC’s compliance checks.
TRF is also available to UK resident individuals (settlors or beneficiaries) who receive a benefit from an offshore trust structure during the same time period. This applies where the benefit is matched to pre- 6 April 2025 FIG.
This means it should become easier to access trust income and gains which previously may have been subject to higher tax rates.
TRF can also apply to FIG where a claim for business investment relief (BIR) has been made. From 6 April 2028 when the TRF period ends, it will no longer be possible to claim BIR on any new investments, or reinvestments.
3. Rebasing options
Capital gains tax rebasing (re-valuing) of non-UK based assets will be available to individuals who have historically claimed the remittance basis from 2017/18 onwards but who cannot benefit from the four-year FIG regime.
Under these rules, assets will be rebased to their market value as at 5 April 2017.
Any individual who became UK domiciled or was deemed domiciled prior to 6 April 2025 will not have access to the rebasing provisions.
Any assets held in trusts or companies will also be excluded from the rebasing rules.
Individuals who previously used the remittance basis rules and had relied on earlier rebasing provisions may still be eligible to rebase assets to 5 April 2017 on disposal. This eligibility is dependent upon them remaining non-UK domiciled under general law in the period to 5 April 2025.
Unfortunately, non-UK domiciled taxpayers who became deemed domiciled at some point between 6 April 2017 and 6 April 2025 will be excluded from any rebasing regime.
4. Offshore Trusts
From 6 April 2025 individuals who do not qualify for the four-year FIG regime will no longer be protected from tax on income and gains within settlor-interested trust structures.
This means that any FIG arising in these settlements will be taxed according to UK resident settlor/transferor rules on an arising basis.
5. Non Dom Inheritance Tax
One of the most controversial aspects of the review to the non-dom legislation is future treatment for inheritance tax (IHT) purposes.
From 6 April 2025 the UK will move to a residence-based system for IHT. This IHT will be charged on worldwide assets for individuals who have been UK resident for ten out of the last twenty tax years.
Where this applies, the individual will remain within the scope of IHT for up to ten years following their exit from the UK. The amount of IHT payable will vary according to how long they were resident in the UK.
For example, any individual who has been a UK resident for between ten and thirteen years will remain within the IHT net for three tax years following departure. This increases by one year for each additional year of residence. Someone who has been a UK resident for twenty years will be subject to IHT for ten years after their exit.
Individuals who are domiciled in the UK (e.g. British expats) fall outside the scope of IHT on non-UK assets provided they have not been UK resident for ten out of the last twenty tax years.
UK assets will remain within the scope of IHT for all individuals irrespective of residence status.
6. Excluded Property Trusts
According to the new rules the only time the concept of domicile will continue to apply beyond 6 April 2025 is when considering the inheritance tax implications for assets held in trusts.
This means the ‘gift with reservation of benefit’ legislation which usually deem trust assets to be within the estate of a settlor upon death, will not apply to non-UK domiciled settlors with pre-existing trusts holding non-UK situs assets.
Instead, the trust will be subject to ten-yearly periodic and exit charges (at a rate of 6%), depending on whether the settlor is a long-term resident under the new ten out of twenty-year rule.
This rule can still apply if the settlor is no longer resident as at 6 April 2025. When the settlor ceases to be long term UK-resident, the trust will be subject to an exit charge up to 6% of the value of the trust assets.
Clearly the new non-dom tax rules are complicated, and we recommend taking expert advice to understand your unique circumstances.
