Introduction

The Spring Budget 2024 saw the announcement of the abolition of the UK’s system of taxing non-UK domiciled individuals, and the introduction of a new regime to tax new arrivers to the UK from 6 April 2025. Transitional rules will apply to those who are already paying tax under the UK’s existing tax regime. 

The new regime

Individuals

• The new regime is to be purely based on tax residence and is intended to be simpler to understand and apply than the existing regime based on domicile. 

• Individuals who have not been UK resident during the previous ten tax years will be eligible for the new regime for the first four tax years of UK tax residence. Individuals who opt to use the new regime will lose their income tax personal allowance and capital gains tax annual exemption, and will be able to decide whether to use the new regime annually. 

• UK income and gains will be fully taxable but foreign income and gains received during tax years in which the new regime applies to the individual will not be taxable in the UK, even if remitted. Distributions from non-UK resident trust distributions will also not be taxable during this period. 

• It will not be necessary to keep track of foreign income and gains received during tax years in which the new regime applies, which should reduce administration.

• Overseas workdays relief will remain available to some employees during the first three tax years of UK residence who receive income from overseas duties. The relief will however be reformed. 

• The government also plans to make changes to inheritance tax. There will be a consultation on this point, though the government’s preferred position is that individuals who have been UK resident for ten years will be subject to inheritance tax on worldwide assets, and will remain taxable on worldwide assets for ten years after leaving the UK. 

Trusts

• The protected trust rules introduced in 2017 to apply to income and capital gains tax arising within settlor-interested trusts are to be abolished. At a high-level, the intention is to tax settlors on both UK and foreign trust income and gains that arise within settlor-interested trusts from 6 April 2025 (unless the new four year regime applies), with no further tax on distributions made by the trustees. Consideration of the application of the existing rules will be required where settlors are not within the class of beneficiaries because they could still have a tax exposure on capital gains in particular. 

• The existing inheritance tax regime that applies to foreign assets held by trusts settled by non-UK domiciled individuals is expected to remain in place for any trusts settled before 6 April 2025. For trusts settled on or after 6 April 2025, inheritance tax charges will depend on whether, at the point of any inheritance tax charges arising, the settlor is UK resident and within the scope of worldwide taxation or within the scope of the 10-year tail for inheritance tax purposes. 

Transitional rules

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

• A two year “Temporary Repatriation Facility” from 6 April 2025 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 flat 12% tax rate. Remittances made after the two year window will be taxed at standard income and capital gains tax rates. The facility will not be available to pre-6 April 2025 foreign income and gains generated in a trust or trust structure. 

• If the remittance basis has been claimed and the individual is neither legally nor deemed UK domiciled by 5 April 2025, there will be an option to rebase the value of capital assets owned personally to their value on 5 April 2019.

• For 2025/26 only 50% of foreign income will be taxable on individuals who have been remittance basis users prior to 6 April 2025. There is no similar reduction for capital gains.  

• Business Investment Relief will remain available after 5 April 2025 for qualifying investments of unremitted foreign income and gains received in tax years in which the remittance basis applied. 

• Pre-6 April 2025 foreign income and gains received by trustees are to be taxable if matched to trust distributions received by UK resident beneficiaries after 6 April 2025 (depending on the specific facts). 

• As noted above, excluded property trust status for inheritance tax purposes will continue to apply to trusts settled before 6 April 2025 by individuals who are neither legally nor deemed UK domiciled. Broadly, this means that trust inheritance tax charges do not apply to foreign assets which do not derive value from UK residential property. 

Areas of uncertainty and actions to take

• A technical paper was published on Budget Day, though we do not have full details of the planned changes.  

• We are told that changes to the mixed funds regime will be made to support the making of remittances under the repatriation regime, though do not yet have detail of these changes. Careful consideration will need to be given to the new rules, and, most likely, careful analysis of remittances to make to the UK will need to be undertaken. 

• 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 will be relevant to both taxation in 2025/26 and later tax years, and to remittances during the temporary repatriation period.

• 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 provisions as they apply to non-UK resident trusts and underlying companies. Under the new regime, additional tax may be payable and additional reporting required in relation to offshore trusts. In certain cases, notably where the trust has underlying trust companies, the motives for the trust structure and impact on taxation will need to be considered.   

• Careful analysis will also need to be given to the taxation of trust distributions. The information published on Budget Day did not refer to provisions to enable individuals to receive trust distributions of post-5 April 2025 foreign trust income or gains that have already been taxed without also being subject to taxation based on 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. 

• As set out above, transitional rules can apply to eligible non-UK domiciled individuals. The availability of these transitional rules hinges on the affected individual being legally non-UK domiciled. Domicile is a key area of HMRC enquiry activity, and HMRC may enquire into the availability of transitional reliefs, or indeed to taxation under the existing non-domicile regime. Due consideration should be given to individuals’ legal domicile position, particularly if new settlements are being created before 6 April 2025. 

Consultation and implementation

• Draft legislation on the income and capital gains tax changes is to be published for comment. Comments will be sought on the detail of the changes, though the government do not intend to seek comment on the policy itself.  

• There will be a consultation on the inheritance tax changes.