A Brave New World – The Abolition of the UK Resident Non-Domiciled Tax Regime and its Replacement

The principal highlights of these sweeping changes to the UK’s tax regime are:

• the removal of the concept of domicile;
• the abolition of the remittance basis of taxation for Foreign Income and Gains (“FIG”) from 6 April 2025; and 
• the introduction of a new 4 year residence-based FIG exemption regime from 6 April 2025.

Under the new FIG exemption individuals who arrive in the UK, following a period of at least ten years of consecutive non-UK tax residence, will be able to claim an exemption from UK tax on qualifying FIG during their first 4 years of UK residence.

The detail set out below is based on our understanding of the technical note¹ released by the UK Government on 30 October 2024. If you think any of the points discussed in this note may impact you, please contact your J.P. Morgan representative and, of course, your independent professional tax advisors.

The new position from 6 April 2025

The effects of the new regime will vary depending on your personal circumstances. In particular, how long you have spent living in the UK as well as if you have previously claimed the remittance basis of taxation prior to 6 April 2025.

Main changes: 

• A new 4 year residence-based FIG exemption regime introduced from 6 April 2025;
• A so-called Temporary Repatriation Facility (“TRF”) for previous remittance basis users;
• Capital Gains Tax (“CGT”) rebasing for eligible individuals’ personally held assets;
• Individuals’ non-UK assets brought within the scope of UK Inheritance Tax (“IHT”) after 10 years of residence in the past 20 tax years;
• Where individuals’ non-UK assets are brought within the scope of UK IHT they will remain in scope for a period of time after leaving the UK, based on their time spent in the UK;
• IHT charged on non-UK assets held in trusts depending on the settlor’s residence status as well as the date of settlement of the trust.

Set out below are some examples of how these reforms will impact certain groups of people depending on their circumstances. 

NEW ARRIVERS

From 6 April 2025, individuals moving to the UK who have not previously lived in the UK in the 10 consecutive tax years prior to their arrival, will be able to claim the 4 year FIG exemption regime.

This relief will only be available for a period of 4 consecutive tax years, with no ability to roll forward the unused relief to future years if it is not claimed. The types of FIG which will be exempt under the regime are similar to those which currently benefit from the remittance basis. However, unlike the remittance basis it is not anticipated that there will be a need to segregate different sources of funds into different offshore accounts and, importantly, FIG earned during the 4 year period can be brought into the UK without any further UK tax implications.

INDIVIDUALS WHO HAVE ONLY BEEN IN THE UK FOR UP TO 3 YEARS

Individuals who became UK resident after 6 April 2022, after at least 10 consecutive years of non-UK residence, and who have been eligible to claim the remittance basis from 6 April 2022 to 5 April 2025, will be able to claim the new FIG exemption regime for 1, 2 or 3 years (depending on which year their UK residence commenced) from 6 April 2025.

Care will need to be taken as to the interaction between the legacy remittance basis regime and the new FIG exemption regime, as the taxation of FIG arising before 6 April 2025 will differ from the FIG received after this date. These individuals may also find they are able to benefit from the TRF, explained below, and may also be able to benefit from CGT rebasing (again more below). 

INDIVIDUALS WHO HAVE ALREADY BEEN UK RESIDENT FOR LONGER THAN 3 YEARS BUT WHO ARE NOT YET DEEMED UK DOMICILED

Individuals who arrived in the UK before 6 April 2022, and who have claimed the remittance basis (or, if they arrived after 2022, but were not non-UK resident for 10 previous consecutive years) will not be able to claim the 4 year FIG exemption regime. If they continue to be resident in the UK from 6 April 2025, will be subject to UK taxation on their worldwide income and gains on an arising basis from that date.

However, these individuals should be able to benefit from the TRF in respect of FIG where the remittance basis has been historically claimed, as well as CGT rebasing, provided that they meet the conditions for the latter, including not being UK Deemed Domiciled.

INDIVIDUALS WHO CLAIMED THE REMITTANCE BASIS AND BECAME DEEMED DOMICILED BEFORE 6 APRIL 2025

Individuals who were UK tax resident non-domiciled and became Deemed Domiciled before 6 April 2025 will have already made the transition away from being able to claim the remittance basis and will now be paying UK tax on a worldwide arising basis.

These individuals are unlikely to see an immediate change to their current tax liability. Their unremitted FIG earned before they became Deemed Domiciled will retain its nature, meaning that if it were to be remitted to the UK it would continue to suffer UK tax at the point it is remitted.

These individuals should be able to benefit from the TRF on this historic untaxed FIG. They will not however have access to the CGT rebasing relief.

PREVIOUS UK DOMICILED OR UK NATIONAL INDIVIDUALS WHO MAY QUALIFY FOR THE 4-YEAR FIG REGIME

A novelty of the FIG exemption regime is that it will be available to UK domiciled and UK national individuals who return to the UK after 10 consecutive years of non-UK residence. These individuals have previously be unable to claim the remittance basis.

The Temporary Repatriation Facility (“TRF”)

The TRF creates the opportunity for remittance basis users with historic untaxed FIG which arose before 6 April 2025 to pay a one-off reduced tax on some or all of that FIG which will then mean it may be brought to or used in the UK without crystallising further UK income and / or capital gains tax liabilities.

The TRF window will be open from 6 April 2025 until 5 April 2028 and amounts designated under it will be chargeable to tax at a special rate of 12% in 2025/26 and 2026/27, and 15% in 2027/28.

Individuals will be able to “designate” any amount of unremitted FIG without having to immediately remit those funds. Crucially, it will also be possible to claim the TRF on FIG where the records as to its composition for UK tax purposes may no longer exist. Once an amount of FIG has been designated under the TRF the tax will be due in the tax year in which the designation has been made.

Individuals will be required to keep their own records of the designations on which the TRF charge has been paid, whether these have been made in respect of a ‘mixed fund’ or amounts containing just one source. These records will not be required to be submitted to HMRC as part of the claim, but may be needed as part of a HMRC compliance check.

For subsequent remittances of designated amounts the “mixed fund ordering rules” will deem the designated amounts to be brought to the UK in priority to other funds. It is understood that it will not be possible to offset foreign tax credits attaching to remitted designated amounts.

The TRF rules will mean that either cash or illiquid assets may be designated. Consequently, individuals who have (re)invested FIG into new investments or assets which are not readily realisable into cash, or which they do not wish to sell will still be able to designate those assets and pay tax accordingly under the TRF.

Individuals who qualify for both the TRF and the FIG exemption regimes will need to make a differentiation between the historical FIG arising before 6^th April 2025 (in relation to which the remittance basis may have been claimed and where the TRF will be available), and the FIG which arises after 6 April 2025 where the FIG exemption is available and which will not need to be designated under the TRF.

Capital Gains Tax (“CGT”) rebasing

Another transitional relief for legacy remittance basis users is that, for disposals made on or after 6 April 2025 of personally owned assets held since at least 5 April 2017, they will be eligible to rebase the cost of those assets when calculating the capital gain or loss arising from the sale. This will be on an asset-by-asset basis with certain conditions attached: 

• The individual must not have been UK domiciled or Deemed Domiciled at any time before the tax year 2025/26; 
• They must have made a claim for the remittance basis in any tax year between 2017/18 and 2024/25; 
• The relevant asset must have been held at 5 April 2017 and disposed of after 6 April 2025; and 
• The asset must have been sited outside of the UK between 6 March 2024 and 5 April 2025. 

Inheritance Tax (“IHT”)

The use of the concept of domicile for the purposes of IHT in the UK is being removed, and will be replaced with a residence based test.

From 6 April 2025, the new test to determine whether an individual’s worldwide estate is within the scope of IHT will be whether they have been resident in the UK for at least 10 of the last 20 tax years immediately preceding the tax year in which a chargeable event occurs. A person who satisfies this criteria will be referred as ‘long-term resident’. 

The length of time an individual remains in scope of UK IHT on their non-UK assets after ceasing to be UK resident will now depend on the amount of time they spent in the UK before leaving:

• For individuals who were UK resident for between 10 and 13 years, they will remain in scope for 3 years following their exit from the UK; 
• This then increases by one tax year for each additional year of UK residence, e.g. if resident for 15 out of 20 tax years they would be in scope for 5 years following an exit from the UK; 
• For those resident over 20 years, they will be in scope for 10 years after leaving the UK – 10 years is the maximum “tail” under these revised rules. 

UK sited assets will remain in scope for UK IHT on the same basis as at present, regardless of the owner’s tax residence.

There will be transitional provisions for non-domiciled or Deemed Domiciled individuals who are non-UK tax resident in 2025/26. They will only be treated as long-term residents if they satisfy the existing Deemed Domiciled test, and if they return subsequently to the UK the new rules will apply. This transitional provision will not be available to anyone who is considered UK domiciled on 30 October 2024 and the new long-term residence test will apply to them from 6 April 2025.

At this time the 10 IHT / Estate Tax Double Tax Treaties that the UK has with other jurisdictions will not be renegotiated. The Double Tax Treaties are: Republic of Ireland, South Africa, USA, Netherlands, Sweden, Switzerland, France, Italy, India and Pakistan.²

Offshore Trusts 

One of the more contentious topics connected with these reforms is the treatment of overseas trusts and, in particular, those trusts which qualified as Excluded Property Trusts (“EPTs”) following the introduction of the Deemed Domiciled rules in 2017.

Under the new IHT regime trusts which qualify currently as EPTs will now be subject to the new IHT long term residence rules from 6 April 2025. IHT will be charged on non-UK assets held in a trust when the settlor of that trust is a long-term resident. This means that trust assets can come in and out of the charge to IHT based on the long-term residence of the settlor, rather than the status being fixed at the time when the property was settled into the trust.

EPTs existing immediately before 30 October 2024 will not be subject to charges under the gift with reservation of benefit rules which could impose a 40% IHT charge on the death of the settlor. However such EPTs will instead fall under the UK relevant property regime from 6 April 2025, charging a 6% flat rate at each 10-year anniversary and up to a 6% exit charge. Additions to the settlement or new settlements post-30 October 2024 will not benefit from these transitional provisions.

Other offshore trust structures not within the relevant property regime will be brought within the charge to IHT based on the long-term residence position of the settlor, at the time of a chargeable event. For example, if the settlor of the trust is considered to be long-term resident at the date of their death, on or after 6 April 2025, then all UK and non-UK settled assets will be in scope for IHT.

The rules concerning the UK tax treatment of offshore trusts and structures were already very complicated before these reforms, and the above described changes will only serve to add a further layer to that complexity. Trustees and settlors will need to seek appropriate professional tax advice concerning the effects of this new regime and what actions may now be needed before the reforms come fully into effect. 

Conclusion

The confirmation of the implementation of the new four-year residence FIG regime, along with the release of the comprehensive draft Technical Note and draft legislation outlining the transitional arrangements, has been broadly welcomed by the UK tax community.

There will be many individuals who will find themselves impacted by the new rules mentioned above, this will range from those who are already in the UK, those who are seeking to arrive in the UK after 6th April 2025 and those who are returning after a long period of absence. These rules, coupled with potential inclusion of advantageous transitional provisions, such as the TRF and the generous tax reliefs under the 4 year FIG regime, suggests that the UK is striving to maintain its competitiveness in the global market. However, the ultimate success of these measures remains to be seen.

¹https://assets.publishing.service.gov.uk/media/672105124da1c0d41942a8a8/Reforming_the_taxation_of_non-UK_individuals.pdf

²https://www.gov.uk/guidance/inheritance-tax-double-taxation-relief