Pre-6 April 2025
The “non-dom” regime had been a long standing and key feature of the UK tax system, enabling individuals whose place of “domicile” was outside the UK to claim the “remittance basis” of taxation. Under this regime, individuals were taxed on their UK-source income and gains, but only taxed in the UK on their non-UK-source income and gains to the extent that they were actually remitted to the UK (i.e., brought into the UK for UK tax purposes). “Non-dom” status could last for up to 15 years, after which individuals became “deemed domiciled” in the UK. Following changes to the regime, the last UK tax year in which a claim for remittance basis of taxation can be made is 6 April 2024 to 5 April 2025.
While the UK’s inheritance tax (IHT) rules were and remain complex, in simple terms, an individual’s liability to IHT depended on whether the assets held at the date of death qualified as “excluded property”. This classification depended on the situs of the assets and the individual’s domicile status for UK tax purposes at the time of death. With the abolition of the concept of “domicile”, the UK IHT rules have also been subject to change.
On or after 6 April 2025
Firstly, as regards the changes to the UK IHT rules, the regime has moved from a domicile-based system to one based on long-term residence. The rules are complex, but in summary, UK situs assets remain liable to UK IHT regardless of the owner’s residence status, while non-UK assets are subject to UK IHT only if the owner has been a UK tax resident for at least 10 out of the last 20 years. A modified test applies to individuals under the age of 20 immediately before the start of the relevant tax year, and transitional provisions apply where certain conditions are met. Once a person becomes a long-term UK resident, they must be non-UK tax resident for a certain period before they lose this status and their non-UK assets fall out of the UK IHT (this is known as the “tail period”). The length of the tail period depends on how long the person has been a UK resident prior to leaving the UK. For example, someone with 10 years of UK tax residence has a three-year tail, whereas someone with 15 years has a five-year tail.
Under the new rules, individuals who establish their residence in the UK for the first time after 6 April 2025 will benefit from a four-year transitional period. During this period, they will not be subject to UK tax on foreign income and gains (FIG) arising on or after 6 April 2025, even if remitted to the UK. Once that four-year period ends, they become fully taxable in the UK on their worldwide income and gains in the usual way. A claim must be made for each tax year in which the FIG regime is to apply, and such a claim is not mandatory.
For non-domiciled individuals who are already UK tax resident, some may be able to benefit from the FIG regime for a period of time, depending on when they first became a UK tax resident. For example, an individual who became a UK tax resident in the 2022/2023 tax year after a ten-year period of non-UK residence would have completed three years of UK residence by 6 April 2025, and would therefore be entitled to claim the FIG regime for one year (i.e., for the 2025/2026 tax year). Others who were not eligible for the FIG regime as of 6 April 2025 will be liable to UK tax on their worldwide income and gain from that date. FIGs that arose to a remittance basis user before 6 April 2025 will remain taxable if remitted to the UK on or after that date, subject to any transitional relief available under the “temporary repatriation facility” (TRF).
From 6 April 2025, for a period of three tax years, UK-resident individuals who have claimed the remittance basis in their UK tax return for at least one tax year may elect to pay tax at a reduced rate on remittances of untaxed pre-6 April 2025 FIGs. The reduced UK tax rate is 12% for the 2025/2026 and 2026/2027 tax years, increasing to 15% for 2027/2028.
In order to use the TRF, an election must be made in the relevant tax return. However, whether to elect should be assessed on a case-by-case basis, taking into account any foreign taxes paid and the availability of tax credits.
Comment
These changes to the UK tax rules for individuals represent a significant shift in the way the UK tax system operates. For those individuals coming to the UK for the first time, the four-year FIG regime is a welcome development, allowing them to be taxed in the UK only on UK-source income and gains during that period. For others already in the UK before the changes, it may be beneficial to use the TRF and apply the 12% or 15% tax rate, although affected individuals should seek expert tax advice on a case-by-case basis. In all cases, the changes to the UK IHT regime, and the tail period introduction, must be carefully considered, and arguably of greater significance than the revised scope of UK taxation on income and gains for individuals considering a move to or from the UK in the coming years.