Current position

As of today, individuals who are domiciled outside the UK, can claim to pay their UK income and capital gains tax on a remittance basis. This means that non-UK income and gains are not taxable as they arise, but instead are taxable in the UK in the year the funds are remitted to the UK.

This tax treatment is subject to the individual making an election, and once they have been resident in the UK for seven years, a remittance basis charge must be paid for each year they wish to make this election.

Since 2017 deemed domicile rules were introduced to prohibit long term UK residents or previously UK domiciled individuals claiming this basis of taxation – maybe in hindsight that was the beginning of the end.

UK Inheritance tax (IHT) is also based solely on the individual’s domicile. This means that non-UK domiciled individuals are only subject to UK IHT on their UK assets.

Proposed changes

The proposed changes announced in March were to remove the concept of domicile from the UK tax system from April 2025, and thus remove the remittance basis. Prior to the election Labour indicated that they were broadly in agreement with the proposed changes. However, in late July they have published an outline of their vision.

The main concept being to move away from domicile to a system based instead on residence.

The proposal is to introduce a new Foreign Income and Gains (FIG) regime from 6 April 2025:

• The current remittance basis of taxation would end.
  
• Individuals who become UK resident, having been non-UK resident for the previous 10 years, would not pay UK tax on their FIG for the first four years of UK residence, even if they are remitted to the UK.
  
• Any UK resident individuals who would still be within their first four years of UK residence on 6 April 2025 will qualify for the above for the remainder of their first four years in the UK.
  
• A facility to remit any pre-April 2025 FIG to the UK at a flat tax rate will be available. The rate and length of time this facility will be available is still to be decided and is expected to be announced at the Budget in October, currently it is only defined as being “attractive”.

Domicile doesn’t only impact income and capital gains, but it is the basis of the UK IHT system. Therefore, this is also proposed to change to a residence-based tax. The suggestion is that being UK resident for 10 years would bring the individual’s worldwide assets into the scope of UK IHT. And they would remain within the net of IHT for 10 years after they leave the UK.

What about trusts?

Settling a non-UK trust whilst non-UK domiciled has been a standard tax planning strategy for many years.  This can ringfence non-UK assets from UK IHT even if the settlor becomes domiciled in the UK in the future.

The proposed changes would affect trusts where either the settlor or a beneficiary is domiciled outside the UK.

For settlor interested trusts settled by a non-UK domiciled individual, non-UK income and gains arising on or after 6 April 2025 will be taxable on the settlor under the new FIG regime. This will bring the tax position in line with that for UK domiciled settlors.

An attraction of trusts for non-domiciled settlors is that for IHT the trust’s domicile is based on the position when the trust is set up.  Therefore, settling a trust whilst non-domicile with non-UK assets, can shelter those assets from UK IHT even if the settlor becomes UK domicile in the future.  This “excluded property” trust treatment is also planned to end.  It appears that the test will be changed to looking at the settlor’s position under the residency-based test on any occasion in which the trust could be chargeable to IHT.

This will of course impact current structures, as such the Government is considering how this will be implemented to provide parity between the IHT treatment for long term UK residents and their trusts, whilst allowing appropriate adjustments to existing structures to be made.

This is an area of uncertainty for many business owners, where offshore trusts have been included within their corporate structures. We will be watching any further announcements closely and working with our clients and contacts to navigate these changes. 

This article was published in the Autumn 2024 edition of Business Time in Essex .