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Changes to the UK’s Special Tax Regime for Foreign Income and Gains
With much uncertainty surrounding the end to the non-domicile regime, Helen McGhee and Lynnette Bober provide a helpful summary of the (currently) anticipated changes.
Current Regime |
Budget March 2024 (Conservatives) |
April 2024 Labour |
Policy Paper 29 July 2024 (Labour) |
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Who can benefit from the special regime –for income tax and CGT. |
UK residents with a common law foreign domicile who are not deemed UK domiciled. |
New arrivers - those who have been non-UK resident for a continuous 10-year period - in their first 4 tax years of residence. |
Labour supported the changes announced at Spring Budget. |
No change. |
Special regime for foreign income and gains (FIG). |
The remittance basis (“RB”). Foreign domiciled UK residents can claim the RB such that they are only taxable on foreign income and gains when remittances are made. Where a claim is made the individual cannot benefit from the personal allowance or CGT annual exemption. After specified periods of UK residence a Remittance Basis Charge – the amount determined by years of prior residence – will be payable. |
The 4-year FIG regime. Where a claim is made foreign income, and gains are exempt from UK tax regardless of whether they are remitted to the UK or not. No charge payable to benefit from the regime. However, an individual benefitting from the regime cannot also benefit from the personal allowance and CGT annual exemption. After the 4 years the individual is subject to worldwide tax on income and gains. |
Again Labour supported the changes announced at Spring Budget. Said they would consider a specific incentive for UK investment within the 4- year period. |
Broadly, no change with respect to support for 4- year FIG regime. Nothing further said about the incentive for investment in the UK within the 4-year period. Did say that the government would review some other key areas of the previously announced reforms to ensure that “the new regime is both fair and as competitive as possible”. |
Overseas Workday Relief (OWR) |
Special regime for the first three years of residence such that an individual carrying out employment duties in the UK and overseas can claim the RB on the overseas portion of the income. Complex rules that are poorly understood in general. |
Further consultation promised. Broadly, from 2025/26 to benefit the individual would have to also be eligible for the new 4-year FIG regime. OWR will only be available for the first three tax years. For that period OWR will provide a complete exemption from UK tax for the portion of the employment income that can be attributed to overseas duties. |
Silent. |
States that a form of OWR will be retained and that officials will engage with stakeholders on the design principles for this tax relief. Engagement to happen in August with an announcement in the 30 October 2024 Budget. |
Budget March 2024 (Conservatives) |
April 2024 Labour |
Policy Paper 29 July 2024 (Labour) |
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Transitionalprovision1: Income tax reduction |
Specific relief announced for UK resident foreign domiciled individuals who had been eligible for the RB and would be subject to tax on the worldwide basis from 2025/26. For tax year 2025/26 only the amount of foreign income taxable was to be reduced by 50%. |
Labour does not support this proposal and will not introduce it. |
No change to the earlier decision to not introduce this transitional provision. |
Transitionalprovision2: CGT rebasing |
Available to individuals who have claimed the RB and are neither UK domiciled, nor UK deemed domiciled by 5 April 2025. Rebasing to the 5 April 2019 value announced for assets held personally by such individuals. |
Silent. |
Support for rebasing for current and past RB users. The rebasing date may not be 5 April 2019. What date would be appropriate is being considered and will be announced at the 30 October 2024 Budget. |
Transitionalprovision3: Temporary Repatriation Facility (TRF) |
Available to individuals where the foreign income or gains arose/accrued in a tax year when the individual was taxed on the RB and the individual was UK resident in the relevant year. A fixed 12% rate would apply to all sums brought to the UK under this facility in tax years 2025/26 and 2026/27. It was understood that: a. there would be no regard paid to what the amounts traced to; b. no credit given for any foreign tax credit; and c. the TRF would not apply to pre-6 April 2025 FIG generated within trusts and trust structures. |
Concern expressed that the two tax year period will not be long enough and that there will remain sizable, stockpiled FIG overseas and a huge disincentive to bring it to the UK. Commitment to explore ways to encourage people to remit stockpiled FIG to the UK, so that the legacy of the RB rules can be ended. |
Commitment to the TRF again made clear. Stated that the reduced rate and length of time that the TRF will be available for will be set to make use as attractive as possible. Commitment to consider ways to expand the scope of the TRF, such as including stockpiled income and gains within overseas structures within the remit. Details to be confirmed in the 30 October 2024 Budget. |
Current Regime |
Budget March 2024 (Conservatives) |
April 2024 Labour |
Policy Paper 29 July 2024 (Labour) |
|
Non-UK resident trusts – the trust protections. |
Provided additions are not made to the trusts, UK resident foreign domiciled settlors who could benefit from non-resident trusts are only subject to tax if they receive distributions or benefits from the trust. As such, they are not subject to the UK anti-avoidance provisions in the same way they UK resident and UK domiciled individuals are. These favourable provisions are referred to as the “trust protections”. |
For income and gains arising/accruing after 5 April 2025 the trust protections will not apply. Anyone who comes within the 4-year FIG regime will not be taxed under the anti- avoidance provisions on foreign income or any gains arising within the trust structure whilst the 4-year FIG regime applies. Equally they will not be taxed on income or capital distributions received from the non-UK resident trust in that period. After that, or for those who do not qualify for the 4-year FIG regime, they will be subject to the full rigour of the anti- avoidance provisions. If they can benefit from the trust this means being subject to tax on all trust income on the worldwide basis and on the net trust gains each tax year. |
Labour will follow the Conservative government plans. |
No changes to the plans announced. |
What is the IHT regime for individuals based on? |
Domicile based system. |
Move to a residence-based system. |
Labour will follow the Conservative government plans. |
No change. |
What is the special IHT regime for foreign assets owned directly by individuals? |
Foreign domiciled individuals – provided they are not deemed domiciled – are not subject to UK IHT with respect to their foreign situs assets. |
An individual will be subject to UK IHT on foreign situs assets after ten years of UK residence. In addition, a ten-year tail was announced. This means that any individual caught within the UK IHT net will have to be non-UK resident for ten- years to be free of its clutches. |
Labour will follow the Conservative government plans. |
No changes to the plans announced. Stated that there will be further engagement with stakeholders in August. |
What is the IHT system for trusts based on? |
Domicile based system. |
Move to a residence-based system. |
Labour will follow the Conservative government plans. |
No change. |
Current Regime |
Budget March 2024 (Conservatives) |
April 2024 Labour |
Policy Paper 29 July 2024 (Labour) |
|
What is the special IHT regime for trusts? |
The excluded property regime. Trust property settled whilst an individual has a foreign common law domicile and is not deemed UK domiciled is outside the scope of UK IHT provided it is foreign situs. |
For trusts settled after 6 April 2025 the end of the use of excluded property trusts to keep property outside of the UK IHT net. The IHT position of trusts under the new regime will mirror the position of the settlor. That is, it seems that when the settlor is outside the scope of IHT so is the trust and when the settlor is within the scope to IHT (including the ten-year tail period) the trust will be too. This means that the IHT relevant property regime will apply to most trusts. In addition the Gift with Reservation of Benefit (GROB) IHT anti-avoidance provisions will apply where the settlor is a beneficiary of the trust. This means that, if the situation continues, the value of the trust property will also be subject to tax on the death of the taxpayer. |
Labour appeared to support the plans for trusts created after 5 April 2025. |
The policy paper says: “The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here. |
IHT and pre- 6 April 2025 excluded property trusts |
Outside the scope of UK IHT provided it is foreign situs. |
All trusts set up prior to 6 April 2025 by foreign domiciled individuals who are not UK deemed domiciled will be grandfathered for IHT purposes. That is, they would be outside the scope of UK IHT provided that when a chargeable event takes place the trust only includes excluded property. This also means that GROB will not apply, as well as the trust IHT relevant property regime - when the settlor can benefit from the trust. |
Labour will include all foreign assets held in a trust within the scope of UK IHT, whenever they were settled, so that nobody living here for longer than ten years can avoid paying UK inheritance on trust property settled. |
Grandfathering still appears to be ruled out. However, there is a recognition that trusts were established and structured to reflect the current rules. Stated that the government “is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.” As such, there will be transitional arrangements for affected settlors. Consultation in August and the detail will be published at the 30 October 2024 Budget. |
Current Regime |
Budget March 2024 (Conservatives) |
April 2024 Labour |
Policy Paper 29 July 2024 (Labour) |
|
Review of anti-avoidance legislation |
Not applicable. |
Review of offshore anti- avoidance legislation announced. Seems to apply to income tax and CGT anti-avoidance legislation. However, specific mention made of the Transfer of Assets Abroad and Settlements legislation. Said to be to modernise the rules and ensure they are fit for purpose. The following are stated intentions: a. Remove ambiguity and uncertainty in the legislation. b. Make the rules simpler to apply in practice. c. Ensure these anti-avoidance provisions are effective. Not expected to result in any changes before the 2026/27 tax year. |