Wealth // Changes To Tax Rules Relating To Domicile
In March 2024, the UK government announced that they intended to make changes to the way in which UK taxes apply to those who have a non-UK connection, such as non-UK domiciled people (non-doms). On 30 October 2024, the government confirmed that changes would go ahead and produced a detailed note and draft legislation that provide much more detail. This note, in partnership with Irwin Mitchell, summarises the changes. The new rules relate only to tax – domicile will continue to exist as a concept that will be important when looking at, for example, succession laws and family law matters.
When will the new rules have effect?
The rules will have effect from 6th April 2025.
Who might be affected by the new rules?
• Anyone who is or has been a non-dom and has used the remittance basis of taxation in the past;
• Non-doms who are temporarily non-UK resident;
• Anyone who is presently ‘deemed domiciled’ in the UK;
• Anyone who is UK domiciled but has been or is likely to be non-UK resident for more than 10 years;
• Anyone who was resident in the UK for more than 10 years in the past but has since left;
• The settlor and trustees of non-UK resident trusts (foreign trusts) where the trust has or had a UK resident settlor or UK resident beneficiaries;
• The UK resident beneficiaries of foreign trusts; and
• The directors of non-UK close companies with UK resident shareholders.
What to do now?
There is a relatively short window of time for planning before the new rules come into effect and we recommend that anyone who could be affected take advice as to their possible position as soon as possible.
What are the UK tax rules for non-doms and trusts until 5 April 2025?
Individuals who are UK resident are subject to UK income tax and capital gains tax (CGT). However, tax is applied differently depending upon whether or not they are UK domiciled. UK domiciled individuals are taxed on the ‘arising basis’, meaning that their worldwide income and capital gains are subject to UK tax. UK resident non-doms may instead choose to be taxed on the ‘remittance basis’, meaning that their UK income and capital gains are taxed but their foreign income and foreign capital gains are not taxed in the UK unless and until they are remitted (brought to) to the UK.
In order to take advantage of this, it has been common planning for non-doms to claim the remittance basis and to set aside a pot of money (clean capital) that does not include any income or capital gains that have arisen to them since they became UK resident. They can bring the clean capital to the UK tax-free while leaving their foreign income and capital gains overseas where they are not taxed. In respect of inheritance tax, the worldwide estates of UK domiciled individuals are subject to inheritance tax, as are any trusts they create.
Foreign assets of non-UK domiciled individuals are not subject to inheritance tax. Foreign assets in trusts that were funded by non-domiciled individuals are fully outside inheritance tax: they are ‘excluded property’. Finally, there are anti-avoidance provisions (the settlor-interested trust code, the transfer of assets abroad rules and sections 86 and 87 TCGA 1992) under which foreign income and capital gains that are made by a non-UK resident trust or company can be treated as if they are made by the individual who funded the trust or company.
The anti-avoidance provisions are generally disapplied where the individual is not UK domiciled as a result of specific limitations in capital gains tax law and the Protected Foreign Source Income rules (the PFSI rules). UK resident beneficiaries of such structures can also be taxed on benefits they receive from foreign trusts, depending upon the income and capital gains the trust itself has made.
What will be the rules for income and capital gains tax (CGT) after 5 April 2025?
New tax rates The rates of UK personal taxes from 6 April 2025 will be:
No more tax domicile
Domicile will no longer be a factor in deciding how income and capital gains made by a UK resident after 5 April 2025 are taxed. It will also (with limited exceptions) not affect whether inheritance tax applies to personal assets and trusts. The domicilebased system will be replaced with a new tax regime that is instead based on how long individuals have or have not been UK tax resident. The test for UK residence will continue to be the statutory residence test, which is unchanged.
The FIG regime replaces the remittance basis
The remittance basis will be abolished in respect of income and capital gains arising after 6 April 2025. It will be replaced by a new regime, the Foreign Income and Gains regime (the FIG regime). All individuals who are UK resident will be taxed on the arising basis on their post-5 April 2025 income and capital gains unless: • They became UK tax resident after at least 10 years’ non-residence (the year in which they become UK resident is referred to here as ‘year 1’); and • Year 1 was within the previous three tax years, so the FIG regime effectively lasts for four years. This means that, for those who are UK resident in 2025/2026, their year 1 must be after 5 April 2022; and • They elect to use the FIG regime for the tax year in which the income and gains arise.
For example:
Mr X lived in the UK between 2005 and March 2009. He then left and was not UK tax resident. He was seconded to the UK for 8 months by his employer in the tax year 2022/2023. He returns to the UK in 2025/2026. He asks whether he can claim the FIG regime for the tax year starting on 6 April 2025. We first identify the last period when he was non-UK resident for at least 10 consecutive tax years, which is 2009/2010 to 2021/2022. We then identify his year 1, which is 2022/2023. His year 1 is within the last three years. He will therefore be able to elect for the FIG regime for 2025/2026. However, he will not be able to do so in 2026/2027, as his year 1 will then be more than three years past.
Split years will count as years in the UK when calculating whether an individual qualifies to use the FIG regime
Individuals who have been UK resident in any tax year between 2015/2016 and 2021/2022 (inclusive) will therefore be taxed on the arising basis on their worldwide income and capital gains from 5 April 2025 if they remain UK tax resident.
If an individual can elect for the FIG regime, while it applies, they:
• Will pay UK tax on their UK income and capital gains;
• Will not pay any UK tax on foreign income and gains arising to them, whether or not they bring the foreign income and gains to the UK, if they choose that the FIG regime should apply to them. There are some exceptions to this, including foreign employment earnings (Overseas Workday Relief may apply – see below) and gains from offshore bonds;
• Will lose their entitlement to income tax personal allowances and the capital gains tax annual exempt amount. The same rule presently applies to remittance basis users. A FIG election will be made in retrospect, after the end of the tax year to which it applies. The technical guidance issued by the government states that individuals will be able to elect for the FIG regime to apply on a source-by-source and gain-by-gain basis, which means that they can use it for some but not all of their types of foreign income and capital gains. This may be useful if they wish to, for example, claim credits for foreign tax or foreign losses. The draft legislation itself is not entirely clear about how source-by-source claims will work for income and we will hopefully receive more details. How will pre-2025 foreign income and gains be treated? In respect of income and capital gains that arose before 6 April 2025 to individuals who claimed the remittance basis of taxation, the remittance basis will continue to apply but there will be a ‘Temporary Repatriation Facility’ to encourage them to bring monies to the UK. The Temporary Repatriation Facility (the TRF) The TRF is a system designed to encourage UK resident individuals who previously claimed the remittance basis and have unremitted income and capital gains outside the UK to bring them to the UK.
The Temporary Repatriation Facility (the TRF)
The TRF is a system designed to encourage UK resident individuals who previously claimed the remittance basis and have unremitted income and capital gains outside the UK to bring them to the UK. Where an individual previously used the remittance basis, they can designate a particular amount of their unremitted foreign income and gains to qualify for the TRF. If they designate an amount, they will pay tax on it at a tax rate of 12% if the designation is made in their tax returns for 2025/2026 and 2026/2027 or 15% if the designation is in their 2027/2028 tax return.
Once an amount is designated, it can be remitted to the UK free of further UK tax. The designation is of amounts and not particular assets, income or capital gains so can be applied to non-liquid assets, not just cash. There are complex provisions regarding the interaction of the TRF with accounts that contain a mixture of clean capital and/or foreign income and capital gains.
Rebasing Individuals who have claimed the remittance basis in the years 2017/2018 to 2024/2025 inclusive can rebase foreign assets that they held on 5 April 2017 for CGT purposes if they sell them after 5 April 2025. This will only apply to assets they hold personally. Non-UK trusts – income and capital gains The anti-avoidance provisions described above (the settlor-interested trust code, the transfer of assets abroad rules and sections 86 and 87 TCGA 1992) will continue to exist after 5 April 2025.
However, the rules that effectively prevented them from applying to non-doms will be changed. In respect of UK resident settlors of foreign trusts (whether settled before or after 5 April 2025), this means that where the settlor may be able to benefit from the trust structure:
• If they do not or cannot use the FIG regime, income and capital gains that the trust makes after 5 April 2025 will be treated as the settlor’s and the settlor will be taxable on them in the UK;
• If they qualify and elect for the FIG regime to apply to the foreign income and capital gains that the trust makes after 5 April 2025, they will not be liable to UK tax on them. These income and capital gains will not be removed from the trust relevant income and trust gains pools for the purposes of anti-avoidance provisions.
In respect of foreign income and capital gains that the foreign trust made before 6 April 2025, they will no longer be protected.
This means that if a UK resident settlor or other beneficiary receives a benefit from the trust after 5 April 2025 that is matched to such trust income or gains:
• They may be treated as if they are receiving foreign income or capital gains (depending how much relevant income or trust capital gains there are);
• If they are using the FIG regime, they will not pay tax on the income or capital gains and can bring them to the UK tax-free but if they cannot claim the FIG regime, they will be subject to UK tax on them. There is specific provision for individuals who have transferred assets to a person/entity abroad and who are taxed under the transfer of assets abroad rules on income that person/entity receives to reclaim that tax from the person/entity.
Business investment relief (BIR)
This is a relief from tax for remittances of money or assets to the UK that is used in a trading business. BIR will continue to apply to investments made before 6 April 2025. New investments will only qualify for BIR if they are made before 6 April 2028. Overseas workday relief (OWR) From 6 April 2025, eligibility for OWR will be determined by an individual’s residence and not their domicile. Where an individual qualifies for the FIG regime, they will also be eligible to claim OWR. The relief can be claimed for up to four years, compared to the current three-year limit.
The relief will be subject to an ‘annual financial limit’ for each year, being the lower of:
• 30% of their qualifying employment income
• £300,000 Individuals will no longer have to keep their overseas earnings outside the UK to use OWR.
If an individual receives employment income after 6 April 2025 that relates to employment duties performed pre-6 April 2025 (such as a bonus), the pre-6 April 2025 OWR rules will apply and it will be taxable on the remittance basis. This means that employment income relating to pre-6 April 2025 duties will still need to be paid into a qualifying overseas bank account and kept offshore to benefit from OWR. Individuals who claimed OWR relief in a tax year prior to 6 April 2025 but do not qualify for FIG will still be eligible for OWR for their first three years of UK residence. Individuals who are part-way through their three-year claim at 6 April 2025 and are eligible for the four-year FIG regime, will be able to benefit from OWR for a total of four years and will not be subject to the financial limits. Unremitted income qualifying for OWR can be nominated under the TRF and taxed at the TRF rates (as detailed above). Inheritance Tax (IHT) after 5 April 2025 There will be a change to a residency-based system for IHT from 6 April 2025: domicile will no longer (with very limited exceptions) determine whether IHT applies to an asset or not. Under the new rules, once a person has been resident in the UK in 10 of the preceding 20 tax years, they are a ‘long term resident’ and their worldwide assets will be subject to IHT. Years before 2025 will be counted, so this will catch non-doms who have been UK resident for 10-15 years by 5 April 2025 and whose non-UK assets would previously have been outside the scope of IHT.
The rules will extend to young people under the age of 20 with modifications – parents who have children who are attending or have attended school or university in the UK should check their status. If a person who has been a long-term resident leaves the UK, there will be a period during which they will still be subject to IHT. This is the ‘tail’. The length of the tail will depend upon how long a person has been UK resident in the last 20 tax years:
There is a special rule for individuals who are currently deemed domiciled under the existing 15/20 year tax rule but who leave the UK before 6 April 2025 and are not UK resident in 2025/2026 and subsequent tax years. Their tail will effectively be three years.
Estate tax treaties
The UK has estate tax treaties with France, Italy, India, Pakistan, Ireland, the Netherlands, South Africa, Sweden, Switzerland and the United States. The first four predate 1975 and their protections are based on common law domicile and not deemed domicile or long-term residence. It appears that this will be unaffected by the changes. Non-UK trusts, excluded property settlements and IHT From 6 April 2025, whether or not IHT will apply to a trust will depend upon whether its settlor is alive and whether he or she is or was a long term resident. The overall effect is that generally: • Where the trust has a living settlor who is a long term resident at the time of an IHT event, such as a 10-year anniversary, IHT will apply to the trust’s UK and non-UK assets; • Where the trust has a living settlor who is not a long term resident at the time of an IHT event, IHT will not apply to the trust’s non-UK assets (they will be excluded property) but will apply to its UK assets; • Where the settlor of a trust died before 6 April 2025 but was not UK domiciled when the trust was settled, the trust’s nonUK assets will be excluded property and outside the scope of IHT; • Where the settlor of a trust died before 6 April 2025 and was UK domiciled when the trust was settled, the trust’s UK and non-UK assets will be within the scope of IHT. • Where the settlor of a trust dies after 5 April 2025, IHT will not apply to the trust’s non-UK assets, which will be excluded property if the settlor was not a long-term non-resident at the time the trust was settled. If they were a long-term resident at their death, IHT will apply to the trust. Whether or not the settlor can benefit from the trust will not be relevant to deciding whether the trust itself is subject to IHT, except where a beneficiary has an interest in possession, where it may still have an effect.
In relation to settlors of trusts, if they can benefit from trusts they have created (so have made a gift with reservation of benefit) and they are long term residents when they die, the assets of the trust will be subject to IHT on their death unless the assets are non-UK assets that were added to the trust before 30 October 2024 by a non-domiciled person. What does this mean in practice? We have described below some common scenarios and how the new rules may apply. The scenarios are simplified versions of reality so should not be taken as the final word on the tax position in practice. In particular, they do not take into account tax treaties the UK has with many other countries, which may prevent UK tax applying or give credit for non-UK taxes
What does this mean in practice?
We have described below some common scenarios and how the new rules may apply. The scenarios are simplified versions of reality so should not be taken as the final word on the tax position in practice. In particular, they do not take into account tax treaties the UK has with many other countries, which may prevent UK tax applying or give credit for non-UK taxes.
Irwin Mitchell are specialists in advising on complex cross-border UK tax issues. If you would like to discuss your position and possible planning, please contact: Helen Clarke Partner, International helen.clarke@irwinmitchell.com +44 (0)203 0403455