The UK Spring Budget 2024: Amendments to Taxation for Individuals Outside the UK
Starting from April 6, 2025, the existing non-domicile regime will come to a close, replacing the concept of domicile as a pertinent connecting factor in the current tax structure with one grounded in tax residency.
Currently, individuals residing in the UK but not domiciled can enjoy the remittance basis for their initial 15 years of residency in the UK. This means that they are not obligated to pay UK taxes on income and gains earned outside the UK unless those funds are brought into the UK.
With the forthcoming system, individuals who choose to opt into this new framework will be exempt from UK taxes on any foreign income and gains for their initial 4 years of tax residency, provided they have maintained non-tax residency status for the preceding 10 years.
Who is eligible for new regime?
Individuals will qualify for the new regime if they have been non-UK tax resident for at least 10 consecutive tax years, regardless of their domicile status. The new regime will apply for their first 4 tax years of UK residence, so this will apply to returning UK domiciliaries.
Main summary of changes
Individuals will not pay tax on foreign income and gains (FIG) arising in the first 4 years after becoming UK tax resident, where a claim is made. They will be able to bring these funds to the UK free from any additional charges and there will be no need to segregate or trace funds during this period. They will continue to pay tax on UK income and gains, as is the case for non-domiciled individuals now. The individual will also lose their entitlement to personal allowances and the capital gains tax annual exempt amount.
Individuals who on 6 April 2025 have been tax resident in the UK for less than 4 years (after 10 years of non-UK tax residence) will be able to use the new regime for any tax year of UK residence in the remainder of those 4 years. For example, an individual who became resident in the UK in 2022/23, after a 10 year period of non-residence, will have been resident in the UK for up to 3 tax years on 6 April 2025. They will be able to claim under the new 4 year FIG regime for 2025/26 because this is their fourth year following a period of 10 years non-UK tax residence.
Transitional Provisions
As the new regime will represent a significant change for existing Resident Non-Domiciled individuals, there are a number of transitional arrangements that will be available as follows:
- Individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new 4 year regime, will for 2025/26 only pay tax on 50% of their foreign income. This applies to foreign income only and does not apply to foreign chargeable gains. For 2026/27 onwards, tax will be due on worldwide income and gains in the normal way.
- Individuals who have previously claimed the remittance basis of taxation and are neither UK domiciled not deemed domiciled by 6 April 2025, will be able to elect to rebase assets held personally to their value at 5 April 2019, so they will only be taxed on capital gains since that date. This is in respect of disposals which take place on or after 6 April 2025.
- Individuals who have previously been taxed on the remittance basis will be able to elect to remit foreign income and gains that arose before 6 April 2025 to the UK at a reduced rate of 12%. This is a new Temporary Repatriation Facility that will only be available for the 2025/26 and 2026/27 tax years. This facility will not apply to foreign income and gains generated within trusts and trust structures.
Taxation of assets held in Trust
From 6 April 2025, the protection from taxation on future income and gains that arise within trust structures (wherever established) will be removed for all current non-domiciled and deemed domiciled individuals who do not qualify for the new 4 year FIG regime.
Under the new regime, for as long as an individual qualifies for the new 4 year regime, they will not pay UK tax on the income and gains of the trust as they arise or on receipt of trust distributions.
Once the individual Is no longer eligible for the new 4 year FIG regime, they will be required to pay UK tax on all profits arising within a trust structure which they have established.
Inheritance Tax
Currently, an individual’s liability to Inheritance Tax depends on their domicile status and the location of the asset in question. From 6 April 2025, the government intends to move IHT to a residence-based system and this will be subject to consultation on how this is best achieved.
The timing of any legislation enacting the changes is unclear and the government has suggested that an individual’s worldwide assets would fall with the scope of UK inheritance tax once the individual has been UK resident for 10 years. It is suggested that once the individual is within the scope of UK inheritance tax they will remain as such for 10 years after the individual ceases to be UK resident.
Under the current rules, non-UK assets held in trust structures that were established by Resident Non-Domiciled individuals before they became deemed domiciled in the UK, are outside the scope of UK inheritance tax. The government has confirmed that the treatment of non-UK assets settled onto non-UK trusts before 6 April 2025 will continue to be outside the scope of the UK Inheritance Tax regime.
Conclusion
The announcements in the Spring 2024 Budget represent the biggest change to the way in which non-UK domiciled individuals are taxed in the UK. This is an area which is likely to continue to develop and further details will emerge in the coming months which will hopefully allow individuals time to prepare for the new regime well in advance of its implementation date of 6 April 2025.
If you would like any further information regarding the new measures outlined above, please don’t hesitate to contact your usual Dixcart contact or enquire at advice@dixcart.com
