Julia Peake, Technical Manager, Nucleus Financial, provides an update on the tax position of non-domiciled UK resident individuals following new updates from HMRC.
In September, I wrote an article on the tax changes applicable for non-domiciled individuals, who are UK residents from April 2025, but we were waiting further information which was delivered in The Budget.
While most of the information has remained, there are some important updates so let’s review what these changes are, how these might impact clients and what they should be looking to do between now and the new tax year.
Summary of the changes
- UK residents who are non-domiciled or deemed domiciled currently have the option to be taxed on a remittance or an arising basis for any foreign income and gains (FIG) they have.
- From April 2025, remittance basis will be abolished, and this will be replaced with a residency based scheme, which will provide 100% relief on eligible FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in the 10 tax years immediately prior to their arrival.
- If an individual had a period of ten consecutive years of non-UK residence prior to their arrival and still within their first four years of UK tax residence under the Statutory Residence Tests, they could apply for the 4-year FIG regime.
- Individuals will need to make an application for this to apply each year via their self-assessment.
- Those who do not meet the conditions for the new scheme will pay tax on an arising basis on all worldwide income and gains, the same as a UK resident and domiciled individual.
- These rules also extend to settlor interested trusts, which had protections prior to these rules changing.
- Current and past remittance basis users will, be able to rebase personally held foreign assets for CGT purposes to its market value on 5 April 2017 for disposals on or after 6 April 2025, subject to:
- The individual must not have been UK domiciled or deemed UK domiciled at any time before tax year 2025 to 2026.
- They must have made a remittance basis claim for any one of the tax years 2017 to 2018 to 2024 to 2025.
- They must hold the relevant asset situated outside the UK from 6 March 2024 to 5 April 2025, on 5 April 2017 and dispose of it on or after 6 April 2025.
- A Temporary Repatriation Facility (TRF) will be introduced to encourage individuals to remit their previously untaxed FIG to the UK. It will be available for 3 tax years, from 6 April 2025 and charged at 12% in tax years 2025/26 and 2026/27 then 15% in tax year 2027/28. To make a designation under the TRF, an election must be made in a Self-Assessment return for the relevant tax year.
- Inheritance tax also moves to a new residency where once you or a settlement qualifies as a “long-term resident” you will be charged IHT on your worldwide assets.
- A “long-term resident” is one who has been a UK resident for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises.
- Excluded property will not be fixed at the time the assets are added to a settlement. Instead, they excluded and not subject to tax charges when the settlor is not long-term resident. When a settlor is long-term resident, any assets they have settled (even when not long-term resident) will be subject to IHT. This is a change to the original proposals which would have abolished excluded property trusts (EPTs).
- The new rules means settled assets can come in and out of exclusion depending on the residency status of the settlor.
- Where EPTs were established immediately before 30 October 2024, they will not be subject to charges under the gift with reservation provisions or certain charges under the qualifying interest in possession regime. However, they will be subject to charges under the relevant property regime (where applicable) from 6 April 2025.
- Where the settlor of a trust dies on or after 6 April 2025, the excluded property status of the trust will depend on the settlor’s long-term residence status at their death; if they were not long-term resident when they died then non-UK settled assets will be excluded property and if they were long-term resident at death then all UK and non-UK settled assets will be in scope for IHT for the duration of the trust.
- Settlements created by a UK-domiciled settlor who is not long-term resident, will have non-UK relevant property so becomes excluded property and so an exit charge will arise on 6 April 2025. However, there will be no ongoing charges whilst the settlor remains not long-term resident.
- Settlements created by a non-domiciled settlor who is long-term resident, will be subject to the relevant property taxation regime. However, the calculation will reflect the number of years the property was excluded. If they then are no longer a long-term resident in future years post April 2025 then there will be an exit charge applied
The policy paper and draft legislation on this gives more details about the implications of these changes. For clients who are currently non-domiciled but UK residents, those looking to move to the UK, those looking to potentially move away from the UK and those looking to potentially change their domicile, should seek regulated tax advice to review their current holdings before these rules come in to see what the most appropriate plan for them might be and for them to understand how these changes will affect them going forward.
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