Introduction

The government will abolish the existing regime for taxing non-UK domiciled individuals and introduce a new residence-based regime for foreign income and gains from 6 April 2025. Transitional rules will apply to those who are already paying tax under the UK’s existing tax regime. A new residence-based system for inheritance tax will also apply from 6 April 2025.

This briefing note summarises Labour’s intended approach, taking into account details within a policy paper that was published on 29 July 2024. Labour’s plans are similar to plans announced by the Conservatives in the Spring Budget 2024, but there are differences in the detail of the approaches taken by the two parties. Where relevant, we have referred to aspects of the Conservative plans for completeness.   

The new regime

Individuals

• The new regime will provide an exemption from taxation of foreign income and gains during individuals’ first four tax years of UK residence. To be eligible individuals must have been non-UK resident throughout the previous ten tax years. Consequently, the remittance basis will cease to be available to foreign income and gains received from 6 April 2025. 
• The government will retain a form of overseas workdays relief (which is relevant to employees) and will engage with stakeholders on the design principles for this tax relief. 
• The government intend to replace the current domicile-based inheritance tax system with a new residence-based system from 6 April 2025. Individuals who have been UK resident for the ten years prior to the tax year in which the chargeable event (including death) arises will be subject to inheritance tax on worldwide assets. Individuals are to remain within the scope of inheritance tax for ten years after leaving the UK.   

Trusts

• Non-UK domiciled individuals who have settled assets onto trust may currently be eligible for the trust protections, under which eligible foreign income and gains made within the trust, or underlying entities, are only taxable when they are matched to a benefit received from the trust. These protections are to be removed with effect from 6 April 2025 for individuals who do not qualify for the four-year regime.
• At present, broadly, trusts settled by non-UK domiciled individuals are only subject to inheritance tax on UK assets and certain non-UK assets that derive value from UK residential property. The government intend to change these rules so that inheritance tax is chargeable on all non-UK assets. The stated intention is for the new rules to be introduced in a way that will allow for appropriate adjustment of existing trust arrangements while also ensuring that the treatment of all long-term residents of the UK is the same for inheritance tax purposes.

Transitional rules

Transitional arrangements for current UK resident non-UK domiciled individuals are to include: 

• A “Temporary Repatriation Facility” (TRF) to allow foreign income and gains received pre-6 April 2025 to which the remittance basis applies to be remitted to the UK at a reduced tax rate for a limited time period. The government will set the rate and the length of time the TRF will be available “to make use as attractive as possible”. The government is also exploring ways to expand the scope of the TRF, including to stockpiled income and gains within overseas structures.
• Current and past remittance basis users will be able to rebase the value of foreign capital assets owned personally to a specific rebasing date for capital gains tax purposes when they dispose of them. The government are considering an appropriate rebasing date. The government have not commented on the rebasing position of gains arising on disposal of offshore non-reporting funds, called offshore income gains, which are capital in nature but subject to income tax. 
• As noted above, the government is considering how to introduce the inheritance tax changes that are to apply to trusts in a manner which allows for appropriate adjustment of existing trust arrangements. The policy paper also states that transitional rules for settlors affected by the changes to the inheritance tax position of trusts are to be announced.

The previous government proposed that for 2025/26 only 50% of foreign income would be taxable on individuals who have been remittance basis users prior to 6 April 2025. The current government will not proceed with the 50% exemption.      

Areas of uncertainty and actions to take

• We need to know how “foreign income and gains” are to be defined for the purposes of the new regime. For example, will this definition include offshore income gains, which are presently excluded from the trust protections? This point is relevant to both taxation under the new four-year regime and to remittances during the temporary repatriation period.
• While we are waiting for detail of how the transitional rules will apply, based on what we know so far it seems as though at least some aspects of the transitional provisions will only be available to individuals who are legally non-UK domiciled. Domicile is also relevant to individuals in current tax years. Domicile is a key area of HMRC enquiry activity, and due consideration should be given to individuals’ legal domicile position. 
• The previous government stated that changes would be made to the mixed funds regime to support the making of remittances under the TRF, though we did not receive detail of the changes to be made. Labour have not yet specifically commented on the mixed fund rules. Careful consideration will need to be given to any new rules that are introduced, and, in any event, careful analysis of remittances to the UK will need to be undertaken. 
• Consideration will need to be given to how income tax and capital gains tax will apply to both new and existing trusts, taking account of the potential application of the settlements, transfer of assets abroad and capital gains tax provisions as they apply to non-UK resident trusts and underlying companies. The government intend to review offshore anti-avoidance legislation, including the transfer of assets abroad and settlements legislation, so any changes will need to be considered. It is anticipated that no changes will be made as a result of the review before the 2026/27 tax year.
• Careful analysis will also need to be given to the taxation of trust distributions. The information published so far does not refer to enabling individuals to receive trust distributions of post-5 April 2025 foreign trust income or gains that have already been taxed without also being taxable due to being deemed to receive pre-6 April 2025 trust income and gains. This point also arises under the current regime, notably in relation to UK income. 

Next steps

• The government have announced changes that are due to take effect from 6 April 2025 and released a policy paper setting out their initial position. More details will be released in the Budget on 30 October 2024. 
• The government’s stated intention is to provide an opportunity for stakeholders to share views and feedback on the detail of income and capital gains tax legislative changes. Draft legislation is to be published in due course. 
• The government will not carry out a formal policy consultation on moving to a residence-based system for inheritance tax. Instead, it will review stakeholder feedback provided following the Spring Budget 2024 and will carry out further external engagement over summer 2024, including ‘insight gathering sessions’ to gather feedback on legislative changes and practical considerations. Insight gathering sessions will be held on the design principles of overseas workdays relief. 
• During May 2024, the previous government held the first in a series of listening events in which stakeholders could comment on the policy changes announced at the Spring Budget 2024. These events were underway when the General Election was called and all remaining events were cancelled. The remaining sessions will be held in August 2024.