On 29 July 2024, HM Treasury published a policy paper on the government’s proposed changes to the taxation of non-UK domiciled individuals. The government aims to remove the concept of ‘domicile’ from the tax system and implement a new residence-based tax regime, effective from 6 April 2025.

Further detail of the changes is expected at the Budget, on 30 October.

New residence-based regime for foreign income and gains (FIG)

• The government intends to implement the 4-year FIG regime announced by the Conservatives at the Spring Budget 2024.
• From 6 April 2025, new UK residents will receive 100% relief on FIG for their first 4 years of tax residence. The relief provides complete exemption from tax on FIG, which can be brought to the UK without charge, as the concept of “taxable remittance” falls away.
• From the 5th tax year, they will be subject to tax on FIG on the arising basis, as for UK source income and gains and in line with other tax residents.
• Only those who have not been UK tax resident in the preceding 10 years are eligible.
• If the individual is UK resident but also resident or treaty resident elsewhere, that year still counts as a UK tax resident year. A year in which an individual claims split year treatment, will similarly count as a year of UK residence.
• The protection from tax on FIG arising to offshore settlor-interested trusts will come to an end this tax year. From 6 April 2025, a UK resident settlor will be liable to tax on all the trust’s income and gains on an arising basis except where the settlor qualifies for the 4-year FIG regime.

Overseas Workday Relief (OWR)

• OWR is a relief which protects UK resident internationally mobile employees from UK tax on their overseas pay.
• The government has confirmed that tax relief of some sort will remain available for employees that qualify for OWR but the design principles are being reviewed.
• A consultation with stakeholders is underway as part of this review and further details will be confirmed at the Budget.

Transitional arrangements for non-UK domiciled individuals

• Income tax: the previously announced 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime (as
  announced in the Spring Budget 2024) will not be introduced.
• Capital gains tax (CGT): From 6 April 2025, all UK resident individuals (irrespective of domicile) will pay CGT on foreign gains unless eligible for the 4-year FIG regime.
• Current and past remittance basis users can rebase foreign capital assets to their value at the rebasing date for CGT purposes. The government will set out the rebasing date at the Budget.
• Pre-2025 FIG remittances: FIG that arose before 6 April 2025 while an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK under the current rules (including where the individual is eligible for the 4-year FIG regime).
• Temporary Repatriation Facility (TRF): individuals who previously claimed the remittance basis will be able to remit foreign income and gains that arose before 6 April 2025 to the UK at
  reduced tax rates for a limited time period. The rate and length of time of the TRF will be confirmed at the Budget.
• The government is looking at widening the scope of the repatriation opportunity. Although no assurances have been given, this could include income and gains that have arisen within overseas structures, in addition to income and gains that have arisen to the remittance basis user, personally.

New residence-based regime for inheritance tax (IHT)

• Currently, UK IHT is charged according to the situs of the assets and the domicile of the taxpayer at the date of the charge (e.g. death or date of transfer to trust).
• From 6 April 2025, the government intends to move the IHT regime to a residence-based system.
• IHT will be payable on worldwide assets for all individuals who have been resident in the UK for 10 tax years prior to the tax year of the chargeable event (e.g. death or transfer to trust).
• An individual will remain within the scope of UK IHT for 10 years after leaving the UK.
• Where available, treaty relief will continue to apply to ameliorate double taxation.
• Estates will be charged according to the existing rules for deaths before 6 April 2025.

Non-resident trusts

• Trusts settled by a non-UK domiciled individual currently benefit from protections that allows income and gains to be rolled up in the trust tax free and only become taxable when a distribution is made to a UK resident beneficiary. Not all income or gains qualify though and it depends on the precise structure and its history.
• From 6 April 2025, protection from taxation on future income and gains as it arises within trust structures will be removed.
• The government intends to include provisions to allow for adjustments to existing trust arrangements.
• Further details of the changes, including transitional arrangements for existing offshore trusts, will be published at the Budget.