Embarking on a transformative shift within its taxation framework, the UK government is set to redefine the landscape for non-UK domiciled individuals. Slated for a rollout on 6 April 2025, this reform marks the cessation of domicile-based tax considerations, pivoting towards a system rooted in tax residence. This extensive overhaul not only reshapes the taxation terrain for those already residing in the UK but also those contemplating a move to the UK after a significant period abroad. This discourse seeks to unravel the complexities of these changes, shedding light on their implications for affected parties and practitioners alike.
Who Stands to Benefit from Reading This?
Designed to demystify the impending modifications, this analysis is indispensable for non-domiciled individuals within the UK’s bounds and those considering the UK as their new residence after prolonged periods elsewhere. While this exposition delves into the crux of the changes, it merely scratches the surface, with further details and draft legislation expected to follow. It also hints at forthcoming discussions around inheritance tax, promising comprehensive insights after engaging with various stakeholders.
Deciphering the Changes
Come 6 April 2025, the remittance basis of taxation for UK resident non-domiciled individuals will be replaced. A groundbreaking 4-year foreign income and gains (FIG) regime will be introduced, offering tax relief on FIG for the initial four years following a UK tax residency establishment after a decade of non-UK residence. This regime allows for the tax-free remittance of these funds to the UK, marking a significant pivot from existing practices. Additionally, the eligibility for Overseas Workday Relief (OWR) will see modifications, simplifying the qualifications and maintaining relief for a portion of foreign earnings.
A notable shift will also occur in the treatment of trusts, with future income and gains losing their protective tax shield for those outside the new 4-year FIG regime. This change aligns the taxation of trust income and gains with that of UK domiciled individuals, heralding a more uniform approach.
For the tax year 2025-2026, individuals transitioning from the remittance to the arising basis and not qualifying for the new regime will witness a temporary relief, being taxed on only 50% of their foreign income. Moreover, a new Temporary Repatriation Facility (TRF) will offer a reduced tax rate on pre-6 April 2025 FIG remittances for the tax years 2025-26 and 2026-27.
The New Income and Capital Gains Tax Regime
The introduction of the 4-year FIG regime serves as a cornerstone of this reform, exempting eligible individuals from tax on FIG for the first four years of UK tax residency, following a ten-year non-UK residence period. This regime aims to simplify the tax process significantly, removing the need for meticulous tracking of FIG movements. Notably, opting for this regime will necessitate forfeiting personal allowances and the capital gains tax annual exempt amount, emphasizing the need for strategic planning.
The Overseas Workday Relief (OWR) will continue, albeit with a streamlined qualification process. The relief will extend to earnings for employment duties performed outside the UK for the first three tax years of UK residence, irrespective of the remittance to the UK.
Trust Protections and Capital Gains Tax Adjustments
The protective measures for income and gains arising within settlor-interested trust structures will cease for those not qualifying for the new 4-year FIG regime. However, the approach towards pre-6 April 2025 FIG matched to trust distributions will remain unchanged, ensuring a semblance of continuity amidst these sweeping reforms.
A transitionary phase will allow for a reduced tax rate on foreign income for individuals moving from the remittance to the arising basis in 2025-2026. Furthermore, capital gains tax rebasing will be introduced for individuals holding foreign assets as of 5 April 2019, offering a recalibration to the asset’s value at that date.
Concluding the Existing Regime and Moving Forward
The impending abolition of the remittance basis of taxation heralds the end of an era, with the last claims permissible for the 2024-25 tax year. This transition underscores the government’s commitment to a more straightforward, residence-based tax system.
Shifting Sands in Inheritance Tax
The move towards a residence-based inheritance tax system, earmarked for implementation from 6 April 2025, signifies a pivotal shift from the domicile-based regime. This change aims to harmonize the tax treatment of assets, irrespective of the domicile status of their owners, fostering a more equitable landscape.
This transformational journey in the UK’s tax policy landscape is poised to redefine the fiscal obligations of non-UK domiciled individuals. As we inch closer to 2025, the anticipation of further clarifications and legislative frameworks looms large, promising to unravel the intricacies of these changes. Stakeholders are advised to stay abreast of developments, ensuring informed decision-making in this evolving tax environment.
