In his Spring Budget, delivered on 6 March 2024, chancellor Jeremy Hunt announced radical changes to the current tax regime for UK-resident, non UK-domiciled individuals (non-doms). This will see a new system introduced based purely on residence.
Although all the changes announced in the Budget are subject to legislation, and as a result may change before they become law, it’s fair to say that a move towards a residence-based regime of the kind outlined should provide taxpayers with greater certainty.
In next month’s newsletter, you’ll be able to read about a specific window of opportunity that remains regarding the announced changes to Excluded Property Trusts (EPTs) that you may be able to benefit from financially before the said window closes in April 2025.
But first, read our summary of the proposals and how they could affect you.
1. The new foreign income and gains regime
From 6 April 2025, new taxation rules will apply for individuals who become tax resident in the UK after at least 10 consecutive tax years of non-residence.
For the first four tax years after you become a UK tax resident, you will not pay UK tax on any of your foreign income and gains arising in a tax year. This will apply irrespective of whether you bring these funds into the UK or leave them offshore.
We like an acronym in our profession, and the government has already started referring to these changes as the FIG (foreign income and gains) regime.
It would appear from what we have read that the four years will include split years, so the period in question may actually be less than if you arrive part of the way through a tax year. For example, if you arrive in early January the period in question will be closer to three years and three months.
Because the new rules will be based on previous residency and not domicile, it may well be the case that British expats returning to the UK could benefit from these changes.
After the four-year period, you will be subject to UK tax on your worldwide income and gains, regardless of your domicile.
If you temporarily leave the UK, you can still benefit on your return but only for the period remaining from your original return date.
Claims for FIG will mean you will lose your Personal Allowance and Capital Gains Tax (CGT) Annual Exempt Amount, although with the latter being reduced to just £3,000 from the 2024/25 tax year, this should not be an inhibitor to your claim.
2. The remittance basis and Capital Gains Tax rebasing
Under the existing non-dom rules, if you are a UK resident but non-UK domiciled, you have the option to claim the remittance basis of taxation.
This means that you pay UK tax on income and gains sourced in the UK, but only pay tax on your foreign income and gains if they are remitted to the UK.
Under the proposed new regime, from 6 April 2025 if you are a non-dom and not eligible for the FIG regime and owned an asset on 5 April 2019 which you subsequently sell on or after 6 April 2025, then you can rebase the original acquisition price to whatever it was on 5 April 2019.
This facility could be valuable if you have been a long-term UK resident claiming the remittance basis with significant unrealised gains that have accrued on assets purchased prior to 2019.
For example, if you bought shares in 2012 for £100 each and sell them on or after 6 April 2025, the acquisition cost will be as at 5 April 2019, which could effectively reduce the gain on each share.
3. The temporary repatriation facility
If you have previously claimed the remittance basis, you will be able to remit previously realised foreign income and gains that benefited under the remittance claim to the UK during the 2025/26 and 2026/27 tax years and pay tax of just 12%.
At the end of that two-year period, any unremitted pre-6 April 2025 FIG will then be taxed at normal rates.
If you have an offshore investment portfolio comprised of a mix of capital, income, and gains that have been relieved against UK tax by paying on the remittance basis, a flat rate of tax of 12% will be available when bringing those funds into the UK during the first two tax years after the changes become law.
A full assessment of the merits would be required; however this could potentially provide quite a tax saving compared to the standard top rates of 45% on remitted income and 20% on unremitted gains.
The UK government expects this facility to bring in an additional £15 billion of foreign income and gains onshore to the UK and raise over £1 billion in additional tax receipts.
4. Changes to the way Inheritance Tax will be assessed
As well as the changes to non-dom status, the Budget statement confirmed that the government wants Inheritance Tax (IHT) to also become based on residence rather than domicile.
However, given how significant such a change would be, it will be subject to consultation and is only likely to apply from 6 April 2025 at the earliest.
As outlined in the Budget statement, your estate will only be subject to UK IHT on your worldwide assets once you have been a UK tax resident for a period of 10 years.
In addition, the proposals also confirm that once you are able to meet the residence condition, your assets will remain within the scope of UK IHT unless you subsequently become a non-UK tax resident for a period of 10 years.
This could be particularly attractive, especially if you are a British expat who has been resident outside of the UK for over 10 years. You may wish to return to the UK temporarily because of family, friends, or a new job opportunity, but you have had concerns over the impact of reacquiring UK residency on your domicile and, as a result, your IHT position.
5. Protecting assets in an offshore trust
From 6 April 2025, you will no longer be able to protect non-UK assets from IHT by using an offshore trust.
Currently, as a non-dom, if you have such non-UK assets settled into an offshore trust, they are exempt from IHT. Those assets remain exempt, even if your status changes from non-dom to being UK-domiciled in the future.
We will be looking at this issue in more detail in our May newsletter, but the overriding message now is that it will be important to consider how this could affect you and your estate and be prepared to take action prior to April 2025 or sooner, perhaps before the election of a Labour government, if necessary.
Despite political uncertainty, we can expect changes in 2025
One overriding consideration when it comes to assessing how these changes could affect you is that there will be a general election well before they are due to take effect on 6 April 2025.
As a result, we cannot be certain that all of the proposals you have read about here will actually become law.
However, you may well recall that a lot of the publicity around the chancellor’s statement about non-doms concerned the fact that the Labour party had long stated that it would seek to abolish the non-dom regime and replace it with an alternative system.
As a result, I think it’s safe to say that we are likely to see significant changes in this area in 2025, irrespective of who wins the next election.
Get in touch
If you have any concerns or questions regarding any of the issues you have read about in this article, please get in touch.
You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
Production
