- Has the remittance basis been abolished?
Yes, UK resident taxpayers may no longer claim the remittance basis of tax from 6 April 2025. The last tax year for which the remittance basis can be claimed will be 2024/2025. From 6 April 2025, all UK residents will be subject to tax on their worldwide income and gains, regardless of their domicile status under general law. The new Foreign Income and Gains (“FIG”) regime will however be available from 6 April 2025 for taxpayers in their first four years of UK tax residence, provided this follows a period of at least ten years of consecutive non-UK residence. The FIG regime provides 100% relief from exposure to UK tax on overseas income and capital gains. Former remittance basis users may also be able to use the Temporary Repatriation Facility or TRF and/or benefit from the rebasing of personally held assets for Capital Gains Tax (“CGT”) purposes.
- How can the FIG regime be claimed?
The FIG regime will not apply automatically and will need to be claimed in a taxpayer’s tax return. Failure to do so will mean that the taxpayer will not benefit from the regime in that tax year and will be subject to tax at a taxpayer’s usual rates.
There will be no annual charge payable in order to claim but entitlement to the Personal Allowance and the CGT annual exempt amount will be lost.
A taxpayer’s ability to qualify for the FIG regime will be determined by whether they are UK resident under the Statutory Residency Test or SRT. A tax year in which split year treatment is claimed will be regarded as a full tax year for the purposes of this test.
- Are there any restrictions on who can use the FIG regime?
The FIG regime will be open to anyone for their first four years of tax residence, as long as they have been continuously non-UK resident for 10 tax years. This means that the FIG regime will be available to UK nationals and Formerly UK Domiciled Resident individuals (known as FDRs) provided they have been continuously non-UK resident for at least 10 tax years.
- Can the FIG Regime be used in the context of distributions or benefits from non-UK resident trusts or other overseas entities?
Special rules will apply to benefits received from non-UK resident trusts but broadly speaking the FIG Regime may prevent a taxpayer from being subject to tax on benefits received from both non-UK resident trusts and other overseas entities. Further details are set out under our separate FAQs entitled October Budget 2024 – Main Changes Announced for Trustees and Settlors of Non-UK Resident Trusts and other Entities.
- What is the Temporary Repatriation Facility or TRF?
The TRF will apply for a period of 3 years from 6 April 2025 to include the 2027/2028 tax year. From 6 April 2025, former remittance basis users will be able to make a designation for any amount of foreign income and gains on which they have claimed the remittance basis and pay tax at a reduced amount. These amounts will be charged to tax in the year of the designation at a reduced rate which is 12% in the tax years 2025/2026 and 2026/2027 and 15% in the tax year 2027/2028.
As with the FIG the designation will be made in the taxpayer’s tax return for the relevant year. The TRF will provide an opportunity to designate amounts where the origin of the funds is uncertain or the individual is no longer able to confirm the source of funds. The mixed funds ordering rules have been simplified where a TRF designation is made so that designated amounts will be treated as remitted to the UK in priority to any other amounts, regardless of the year to which the amounts relate.
Amounts designated under the TRF do not have to be brought into the UK immediately; they can remain overseas and be brought into the UK as and when needed without any further charge to tax.
If a taxpayer qualifies for both the TRF and the FIG regime because they were previously resident in the UK more than 10 years before qualifying for the FIG regime, it will not be possible to claim relief under the FIG regime on any amount of untaxed foreign income or gains that arose prior to 6 April 2025 which are remitted on their returns. The remitted foreign income or gains will need to be designated under the TRF or be taxed at the standard UK tax rates.
- What about changes to CGT?
The CGT rates have increased from 10% for basic rate taxpayers and 20% for higher rate taxpayers to 18% and 24% respectively. This will now match the CGT rates applicable on the disposal of residential property. The change took effect from (and including) 30 October 2024.
Rebasing will be available for foreign assets disposed of on or after 6 April 2025. For an asset to qualify the taxpayer must not have been UK domiciled or deemed UK domiciled in the UK at any time prior to 6 April 2025 and must have claimed the remittance basis for at least one of the tax years from 2017/2018 to 2024/2025. The rebasing relief will not apply in situations where an individual automatically qualified for the remittance basis (for instance, because their unremitted foreign income and gains were less than £2,000).
If the asset meets the qualifying criteria the base cost of the asset for CGT purposes can be substituted with its value as at 5 April 2017.
- How will these rules affect Overseas Workday Relief (OWR)
Currently a claim for OWR provides an opportunity for UK residents who are non-UK domiciled (and satisfying other qualifying conditions) to apportion their annual employment remuneration between UK duties and duties performed outside the UK for a period of 3 tax years.
OWR will be retained and will continue to apply to income which relates to overseas duties determined on a just and reasonable basis. From 6 April 2025, eligibility for OWR will be primarily based on whether employees are eligible for the FIG regime. This should provide relief from Income Tax on overseas earnings for a period of 4 tax years.
In addition, unlike the existing regime under which employment income on which OWR is claimed which is remitted to the UK is taxable, employment income on which OWR is claimed under the FIG regime can be brought to the UK without a charge to tax. Unremitted income which qualifies for OWR prior to 6 April 2025 can be designated and brought to the UK under the TRF. In the absence of a specific designation the remittance of such income will be taxable.
- What about IHT?
From 6 April 2025, a new residence based system will determine whether non-UK assets are within the scope of IHT based on whether the taxpayer meets the conditions to be considered a Long Term UK Resident or LTR. An individual is a LTR when they have been resident in the UK under the SRT, for at least 10 out of the previous 20 UK tax years.
Once a taxpayer is a LTR their worldwide assets will be subject to IHT. This will mean that an LTR’s worldwide estate will be subject to IHT on their death and transfers of overseas assets into most trusts will also be subject to IHT. The current rate applying on death is 40% and the current rate for lifetime trust transfers is 20%. The nil rate band (currently £325,00) will still be available.
Lifetime gifts to individuals will still be Potentially Exempt Transfers and therefore not subject to IHT if the LTR survives 7 years from the date of the gift.
The LTR rules will apply regardless of the taxpayer’s common law domicile status. For a taxpayer 20 years old or younger the test will be whether they have been UK resident for at least 50% of the tax years since their birth. The concept of deemed domicile will no longer apply.
- What happens if I leave the UK?
When a LTR leaves the UK they will continue to be within the scope of IHT for up to the following 10 tax years (“10 year tail”).
However, there are provisions in place to shorten the tail if a taxpayer has only been UK resident for between 10 and 19 years out of the previous 20. Broadly speaking, the tail is 3 years where the period of UK residence is between 10-13 years. This is increased by one tax year for each additional year of residence.
For example, a taxpayer resident in the UK for 15 out of the previous 20 tax years will remain within the scope of UK IHT for 5 years (3 years + 2 years) after leaving the UK.
After a period of 10 consecutive years of non-UK residence the taxpayer will no longer be considered an LTR and will no longer be within the scope of UK IHT even if they return to the UK thereafter; the test will effectively reset.
A taxpayer who is currently UK domiciled or deemed domiciled who leaves before 6 April 2025 will be subject to the existing rules.
- How do the new LTR Rules affect Formerly Domiciled Residents (FDRs) from an IHT point of view?
As for Income Tax and CGT the concept of an FDR will no longer be relevant for IHT purposes after 5 April 2025. This means that a UK domiciled individual who has been non UK resident for 10 out of the previous 20 UK tax years will no longer be subject to IHT on their non UK assets after 5 April 2025.
Similarly, such an individual or an individual who is non UK domiciled but was born in the UK with a UK domicile of origin will not be subject to IHT on their non UK assets if they return to the UK until they have been UK resident for 10 tax years.
- Is there anything else I should know from an IHT point of view?
The new LTR rule will have implications for Trustees and Settlors of existing and new Trusts. Further details are set out under our separate FAQs entitled October Budget 2024 – Main Changes Announced for Trustees and Settlors of Non-UK Resident Trusts and Other Entities.
The exemption for transfers between spouses will continue to apply. The availability of the exemption will be limited for transfers from a LTR to a non LTR spouse but, as is the case now for transfers from a UK domiciled spouse to a non UK domiciled spouse, it will be possible for the non LTR spouse to make an election to be treated as a LTR for these purposes.
The IHT Double Tax Conventions which disapply the effect of the current deemed domicile rules for individuals domiciled in certain Treaty Partner countries will continue to apply to alleviate the effects of the LTR rules in certain circumstances.
- What should those affected by the changes do now?
It will be important to take advice on how these rules will affect a taxpayer’s personal circumstances. It will be important to plan ahead in order to minimise the impact of the rule changes after 5 April 2025; for example, should disposals of overseas assets be brought forward or delayed, should gifts of overseas assets be brought forward? Although the consequences of the new rules will be far reaching, they may also present opportunities which should be identified, such as whether it will be possible or beneficial to use the TRF.
For advice on any of these complex new measures, please contact Robert Drysdale or any member of our Wealth Planning Team at the earliest opportunity, certainly well before 5 April 2025.
